Explanation:
The correct answer is D.
Note: We only take into account the remaining mortgage balance, not the initial amount of principal.
Prepayment for month i (in 400m – 395m = **1.63` million)
Why the other choices are incorrect:
$1.65 million): This is close but not exact. It likely results from a rounding or calculation error.$1.25 million): This is too low and does not correspond to the correct SMM calculation.$2.04 million): This value would result from using the full initial principal rather than the remaining balance, or from an incorrect application of the SMM formula.Q.3456 Suppose that an investor owns a pass-through security with an initial principal of $500 million. The remaining mortgage balance at the beginning of a certain month is $400 million. Assuming that the SMM is 0.4125% and the scheduled principal payment is $5 million, the estimated prepayment for the month is:
A
$1.65 million
B
$1.25 million
C
$2.04 million
D
$1.63 million
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