Conditional prepayment rate (CPR) is calculated using monthly data. For a given month, the single monthly mortality rate (SMM) is first calculated:
- Unscheduled Principal is actual principal paid less the scheduled principal, floored at zero
- Scheduled Principal* is the amount of principal due
- Start of Month Balance is the sum of all active loan balances at the beginning of the month, and excludes any defaulted/charged-off loans from previous periods
SMM is then annualized to obtain CPR:
dv01 accounts for the lifetime of payments for each loan when calculating CPR. In the case where a loan has been underpaying its scheduled payments and then makes a large unscheduled payment, no prepayment will be calculated if the aggregate principal paid is still behind schedule.
In calculating rolling CPR, the following equation is used:
where n is the number of months of data used. The calculation compounds each month’s CPR, then annualizes the resulting product.
*In order to normalize prepayment statistics, dv01 uses amortization recasting based on actual performance results. This uses the actual current balance of each respective loan for each month and will adjust future scheduled principal for loans that have either curtailed or missed payments.