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Answer: USD 7,000
To calculate the expected principal prepayment this month: 1. **Annual prepayment rate**: 0.4% per year 2. **Monthly prepayment rate**: 0.4% ÷ 12 = 0.03333% per month 3. **Current balance**: USD 20,000,000 4. **Expected monthly prepayment**: 20,000,000 × 0.0003333 = USD 6,666 This amount is closest to USD 7,000 (Option B). The calculation uses the Single Monthly Mortality (SMM) rate derived from the annual CPR: - SMM = 1 - (1 - CPR)^(1/12) - SMM = 1 - (1 - 0.004)^(1/12) = 0.000333 - Monthly prepayment = 20,000,000 × 0.000333 = USD 6,660
Author: LeetQuiz Editorial Team
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A security with a weighted average loan age of 60 months. The current balance on the loans is USD 20 million, and the conditional prepayment rate is assumed to be constant at 0.4% per year. Which of the following is closest to the expected principal prepayment this month?
A
USD 1,000
B
USD 7,000
C
USD 10,000
D
USD 70,000
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