Dear All:
According to the problem below, why 100 SPA = 0.2%, Could you please explain something about the SPA.
thank you so much for your time
The SMM formula is: SMM = 1 – (1 – CPR)1/12. Calculate the single monthly mortality rate (SMM) for month 6, 100 PSA:
A) 0.000837. B) 0.001259. C) 0.001006.
Your answer: C was correct!
CPR = 0.2% * 6 = 0.012
SMM = 1-(1-0.012)1/12 = 0.001006
t<30, so CPR = t/30 = 6/30 = 0.2%
The CFA text book can answer you better on these questions. Scweser notes for Fixed Income is poor choice.
Good luck!
The PSA “prepayment benchmark” assumes that the monthly prepayment rate for a morrgage pool increases as it ages, • CPR = 0.2% for the first month after origination, increasing by 0.2% per month up to 30 months. For example, the CPR in month 14 is 14 (0.2%) = 2.8%. • CPR = 6% for months 30 to 360. Good luck!