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Answer: 4.70%
Use the standard conversion from SMM to CPR: \[ \text{CPR} = 1 - (1-\text{SMM})^{12} \] With SMM = 0.40% = 0.004: \[ \text{CPR} = 1 - (0.996)^{12} \approx 1 - 0.9529 = 0.0471 = 4.71\% \] So the closest answer is **4.70%**.
Author: Manit Arora
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Q-104.1. Under a constant maturity mortality approach, the monthly rate of prepayment (p) on a mortgage (aka, single month mortality rate, SMM) is found to be 0.40%. What is the annualized conditional prepayment rate (CPR)?
A
4.70%
B
4.80%
C
6.00%
D
95.30%
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