# Easy question, but am i right or wrong?

Qbank asks “which most accurately describes prepayment” a.) pmt that pays mortgage in full prior to maturity b.) payment made in excess of monthly mortgage payment c.) prepayment occurs if both int and principal paid before end of mortgage term So obviously not c., but schweser says the answer is b. I thought CURTAILMENTS where what this is describing, and a prepayment was if it was paid in full. The schweser text even says this, and i confirmed it on wiki (for what its worth), is this question wrong?

Another one… (for some reason the post won’t work just note that the middle values "3.15% and “A”, are suppose to be the node 0 values) Given the following relevant part of the interest rate tree, the value of the callable bond at node A is closest to: 3.44% 3.15% 2.77% Corresponding part of the callable bond tree: \$100 A=====__ \$100 The value of the bond at node A is closest to: A) \$100.00. B) \$101.53. C) \$103.56 Answer: The value of the callable bond at node A is obtained as follows: Bond Value = the lesser of the Call Price or {0.5 × [Bond Valueup + Coupon/2] + 0.5 × [Bond Valuedown + Coupon/2]}/(1+ Interest Rate/2)] So we have Bond Value at node A = the lesser of either \$100 or {0.5 × [\$100.00 + \$6.25/2] + 0.5 × [\$100.00+ \$6.25/2]}/(1+ 3.15%/2) = \$101.52. Since the call price of \$100 is less than the computed value of \$101.52 the bond price would be \$100 because once the price of the bond reached this value it would be called. ------------------------------------------------------------------------------------------------ Shouldn’t they have discounted that \$100 by the node a rate of 3.15%?

curtailment and prepayment are the same thing. B is the correct answer. actually, straight from the CFA text, schweser must have copied word for word think about it this way, curtailment simply shorterns the life, same as a prepayment.

1. No it is not. Prepayment is done when the amount paid back exceeds the principal due for that month. I dont have the CFAI text with me or I would have provided the page number. 2. This is confusing. No where in your question was it mentioned that these are semi-annual payments. Otherwise the terminology which they used would be appropriate for semi-annual payments.

idreesz Wrote: ------------------------------------------------------- > 1. No it is not. Prepayment is done when the > amount paid back exceeds the principal due for > that month. I dont have the CFAI text with me or I > would have provided the page number. > sorry your right. prepayment can be for partial or all of the outstanding balance. curtailment is simply when it is < then outstanding balance

b.) payment made in excess of monthly mortgage payment Correct Answer is B. Monthly Prepayment = (Outstanding Loan Balance - Monthly Payment…, though only Principal Amount will reduce Outstanding Balance) * SMM. I would have picked B on the exam for sure. I think option A is describing curtailment.

I think the text is wrong on book 4. I was surprised to see your post because I emailed asking the same question to Schweser support. This is what he said work for word [The CFA text says “When a repayment is not for the entire outstanding balance it is called a curtailment”]. Even though page 235 says otherwise. i am also surprised how this did not Sch.'s errata-probably he was lazy to go check it out…