 # SMM, PSA, and CPR

Schweser Book 5, pg. 121, #5 Assume that an investor has invested in a mortgage pool with a \$100,000 principal balance outstanding. The scheduled monthly principal payment is \$28.61. (From question 3, it says the CPR is 6%, but no mention of it in the original paragraph) 5) Using the Public Securities Association (PSA) standard prepayment benchmark, the single monthly mortality rate (SMM) in month 10 assuming 175% PSA is closest to: A. 0.002297 B. 0.002363 C. 0.002793 D. 0.002965 The answer Schweser gives is D. They calculate the CPR like this: CPR = 6% x 10/30 = 2% My question, although maybe trivial, is where are they getting the 10/30 from?

Read the section right before that example

the equation for CPR using the PSA 100 is: 6 x (months/30). The 10 is the months, and the 30 is because after 30 moths, the CPR remains constant at 6%.

Got it. Thanks.

ans above is d

at PSA 100 it is assumed that prepayment will be .2 percent per month, leveling out at 3 percent in month 60. Thus .2 percent * 10 equals 2 percent.