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Dont understand this answer

Question:

According to the PSA, if the Conditional Prepayment Rate (CPR) for a 30-year mortgage is 0.6% in month 3, what would the CPR be in he following month, assuming 100% PSA? (schweser exam 1)

Answer: 0.8%

Can someone explain the math/reasoning behind this answer?

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PSA increases each month by 0.2% until I want to say 6% after 30 months (I could be wrong on that).  So if it was 0.6% in month 3 then in month 4 it would be 0.8%

You’re correct; 100 PSA is:

  • Month 1, 0.2% CPR
  • Month 2, 0.4% CPR
  • Month 3, 0.6% CPR
  • And so on until …
  • Month 30, 6.0% CPR
  • Months 31 and beyond, 6.0% CPR

That’s simply the definition of 100 PSA.  You need to know it, just as you need to know that the definition of 1 foot is 12 inches.

Simplify the complicated side; don't complify the simplicated side.

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