Financial Risk Manager Part 1

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Explanation:

If the pool prepaid 1.1% of its principal above its amortizing principal as the percentage of total outstanding principal in the month, then its single monthly mortality rate (SMM) is 1.1%.

The annualized constant prepayment rate (CPR) is calculated using the formula:

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

Substituting the values:

$CPR = 1 - (1 - 0.011)^{12} = 1 - (0.989)^{12}$

$CPR = 1 - 0.8757 = 0.1243$

Therefore, the correct answer is B. 0.1243.

Explanation:

If the pool prepaid 1.1% of its principal above its amortizing principal as the percentage of total outstanding principal in the month, then its single monthly mortality rate (SMM) is 1.1%.

The annualized constant prepayment rate (CPR) is calculated using the formula:

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

Substituting the values:

$CPR = 1 - (1 - 0.011)^{12} = 1 - (0.989)^{12}$

$CPR = 1 - 0.8757 = 0.1243$

Therefore, the correct answer is B. 0.1243.

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Q.924 Billy Clark is an investment manager at the Sachsenhausen Investment Bank based in Dusseldorf. Clark manages a pool of mortgages and the assets constructed with the pool. If the pool prepaid 1.1% of its principal above its amortizing principal as the percentage of total outstanding principal in the month of February, then which of the following is the appropriate annualized constant prepayment rate he can come up with?

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Last updated: July 21, 2026 at 02:10

0.0302

0.1243

0.132

0.1402