# CFAI Mock Exam MBS Problem

Problem #15 on the morning session of the CFAI mock. Why did they recalculate the total principal and interest payment after the first month? Are total principal and interest payments calculated each month on an MBS to reflect the prepays? (unlike a normal single residential mortgage where total mortgage payment is the same each year).

bump again, cant seem to find an answer. Any ideas? So strange to me. On a normal amortizing mortgage, the monthly P&I payment is going to stay the same, in this example, 757,174 each month. Why do they increase it for month #2 to 751,874? I guess this might just be a characteristic of MBS? Do all securitized products do this?

Good question, was wonderig the same. But finally accepted as given;)

You’re right; it’s because of the prepayment. In general, a mortgage payment can be seen as being recalculated each month. To see this for yourself, calculate the payment for any given mortgage over N months. Subtract the principle amount of that payment from the principal balance and recalculate the payment using (N-1) as the number of month. You will get the same payment.

But when there are prepayments, the principal amount decreases by more than was assumed in the original payment calculation, so it must be recalculated each month.

Thanks for the responses guys, and yea I understand how they did it, I just dont understand why. Typically the actual monthly payment on a mortgage stays the same regardless of prepays. On my mortgage, if I send an extra 1000 to principal in a given month, my minimum payment the next month for P&I doesnt change all of a sudden. In this problem they changed that minimum payment by recalculating after the first month payments.

I guess I will just consider it a part of MBS!

“Typically the actual monthly payment on a mortgage stays the same regardless of prepays”

WRONG, it stays the same regardless of scheduled principal repayments! If there are prepayments your initial balance will change and your pmt will change. even in your mortgage, say you borrow 100, you pay 1 per month, and all of a sudden in the middle of the loan while you have 50 left, you decide de prepay 49, do u still think u will have to pay 1 per month until maturity of the loan ?

Not true in the US at least, not sure where youre from. My mortgage payment is the same every month regardless of how much prepayment I do. The only difference to that would be if there isnt enough left at the end to warrant a full payment Id assume. Yea you might end up paying it off earlier, but my minimum monthly payment is the same no matter how much principal I pay off pending the loan amount isnt 0 or close to it.

The books show this too for a regular amortizing mortgage, but then for the MBS they show it being recalculated every month and say its based on some formula but dont go into any detail that I could find.

Hi guys,

Sorry to bring back up this topic but how to calculate the mortgage amount in this question? Answers say 757,174 for first year. How did they get this number? I’ve tried to put in my calculator PV = -117.54, n = 243, i = 4.8%/12, FV = 0 and solve for PMT but I don’t get this number.

Edit: actually I do get this right answer using BA II. Sorry about that…

Thanks guys!