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Conditional Prepayment Rate (CPR)
CPR = 1 – (1-SMM)12
CPR – Conditional prepayment rate
SMM – Single monthly mortality rate
The conditional prepayment rate (CPR) is a method of projecting prepayments for a pool of mortgages each month for the remainder of the mortgage’s lifespan.
CPR is an annual rate.
The pool of loans refers to mortgage-backed securities in the secondary market.
Some important factors that affect the results of the equations includes historical prepayment rates and expected economic environment in the future.
A simple expression of CPR is that it’s the single monthly mortality rate (SMM) being annualized.
When the CPR is 10%, it means that in each period, 10% of a pool’s outstanding principal are fully paid off.
This can be a critical variable for an investor to make financial decisions.
Prepayment rates for example, have been observed to be much faster during periods where the economy was experiencing booms in refinancing.
On top of this, changes in historical patterns of prepayment or economic conditions can be evaluated at any moment in time.
CPR should not be confused with constant prepayment rate.