Explanation:
Under PSA, the conditional prepayment rate rises 0.2% per month for months 1–30 and levels off at a rate of 6%.
Under the first scenario:
Since
140`\text{PSA} = 1.40 \times 4.4% = 6.16%
\text{SMM} = 1 - (1 - 0.0616)^{1/12} = 0.0053 = 0.53%
Under the second scenario, the CPR is after month 30, so $\text{CPR} = 6\%$:\text{CPR} = 6% \ 90\text{PSA} = 0.9 \times 6% = 5.4% \ \text{SMM} = 1 - (1 - 0.054)^{1/12} = 0.0046 = 0.46%
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Q.3050 A risk analyst is reviewing various mortgage-backed securities (MBS) and is interested in the calculation of single monthly mortality (SMM) rates. She is using the Public Securities Association (PSA) standard prepayment benchmark. She calculates the SMM for month 22, assuming a 140 PSA, to be 0.37%. She calculates the SMM for month 200, assuming a 90 PSA, to be 0.46%. Determine whether she is correct in both her calculations.
A
She is correct for both calculations.
B
She is correct for month 22, but incorrect for month 200.
C
She is incorrect for both calculations.
D
She is incorrect for month 22, but correct for the month 200.
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