Regarding conditional prepayment rates (CPRs) and single monthly mortality (SMM) rates, which of the following is most accurate?
a. SMM is computed from the CPR to compute monthly prepayments.
b. SMM is computed from the CPR to compute changes in loan maturity.
c. CPR is computed from the SMM to compute monthly prepayments.

Mark Houston, a level 1 CFA candidate, has just been hired as a junior analyst in the mortgage-management department of Fixed Income Strategies. Mr. Houston is asked to perform some analysis on the mortgage pool shown below. All mortgages are conforming 30-year fixed-rate loans.

Before tackling the job, Mr. Houston does some research on mortgage loans. First, he assembles some facts about the difference between fixed-rate mortgage loans and traditional fixed-income corporate bonds:

• Mortgage loan payments consist of both principal and interest.
•  The final payment on a mortgage does not include the par amount of the loan.
•  Servicing fees on mortgage pools decline as the loan matures.
•  Straight corporate bonds do not include call options.

Marvin Blanda, CFA, CEO of Fixed Income Strategies, tells Mr. Houston to calculate the expected prepayments for the first 12 months for all of the loans in the portfolio. He warns Mr. Houston not to forget about the relationship between conditional prepayment rates (CPRs) and single monthly mortality (SMM) rates.

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Conditional Service Outstanding Weight Mortgage Pool Months Remaining Monthly Prepayment Fee Net in Pool Rate Interest Payment Mortgage (bp) Rate 7.75% $ 860.71 $100,000 19.61% 8.25% 234 50 6.00% 1,082.40 344 7.70 150,000 29.41 55 7.15 3.20 344 45 1,168.88 175,000 34.31 6.90 6.45 3.20 55 16.67 8.65 4 85,000 9.20 345 702.02 3.00