Financial Risk Manager Part 2

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Explanation:

Since $\text{CPR} = 1 - (1 - \text{SMM})^{12}$

\text{SMM} = 1 - (1 - 0.06)^{1/12} = 0.005143

Prepayment = $\text{SMM} \times (\text{Outstanding principal less scheduled monthly principal payment})$
$\quad = 0.005143 \times (\`$ 100,000 - \ $28.61`) = \`$ 514.15`$

Things to remember.

SMM is a measure of the monthly mortgage prepayment rate of the security’s mortgage pool. A SMM of 0.5143% means that approximately 0.5143% of the remaining mortgage balance at the beginning of the month, less the scheduled principal payment, will prepay that month.

In other words,

\text{Prepayment ith month (\$)} = \text{SMM} \times (\text{Principal Bal. i} - \text{Principal Pmt. i})

Explanation:

Since $\text{CPR} = 1 - (1 - \text{SMM})^{12}$

\text{SMM} = 1 - (1 - 0.06)^{1/12} = 0.005143

Prepayment = $\text{SMM} \times (\text{Outstanding principal less scheduled monthly principal payment})$
$\quad = 0.005143 \times (\`$ 100,000 - \ $28.61`) = \`$ 514.15`$

Things to remember.

In other words,

\text{Prepayment ith month (\$)} = \text{SMM} \times (\text{Principal Bal. i} - \text{Principal Pmt. i})

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Q.3048 Trident Investments has invested `$100`,000 in a mortgage pool with scheduled monthly principal payments of `$28.61`. The mortgage pool has a conditional prepayment rate (CPR) of 6% and the pool is seasoned. Given this information, the single monthly mortality rate and the estimated prepayment are closest to:

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Last updated: July 5, 2026 at 07:27

SMM: 0.005098; Prepayment: 509.92

0.0%

SMM: 0.005113; Prepayment: 544.15

0.0%

SMM: 0.005274; Prepayment: 529.25

SMM: 0.005143; Prepayment: 514.15

100.0%