Understanding Constant/Conditional Prepayment Rate (CPR) Calculator
Constant/Conditional Prepayment Rate (CPR) is a crucial metric in mortgage-backed securities (MBS) and asset-backed securities (ABS). It calculates the percentage of outstanding principal that is expected to be paid off prematurely due to prepayments or early loan repayments. Lenders and investors use CPR to gauge the potential cash flow and risks associated with these securities.
How is CPR Calculated?
The formula for calculating Constant/Conditional Prepayment Rate (CPR) is derived from various mortgage factors:
CPR = (1 – (1 – (1 + r)^(-1/n))) * 100
Where:
- r = Monthly interest rate
- n = Remaining term in months
Breaking Down the Formula:
- r (Monthly Interest Rate): This refers to the monthly interest rate applied to the outstanding loan balance.
- n (Remaining Term in Months): Indicates the number of months left on the loan.
Significance of CPR:
- Risk Assessment: CPR helps in assessing the risks associated with MBS or ABS investments by predicting potential prepayments.
- Cash Flow Analysis: It assists investors in estimating the cash flow pattern concerning early repayments.
Using the CPR Calculator:
- Loan Amount: Input the total loan amount.
- Mortgage Interest Rate (%): Enter the annual interest rate.
- Remaining Term (months): Specify the remaining term of the loan in months.
- Click on the “Calculate” button to compute the Constant Prepayment Rate (CPR).