Although the priority rules for the disbursement of the principal payments are known, the precise amount of the principal in each period ________ known. This will depend on the cash flow and, therefore, on the principal payments of the collateral, which will depend on the ________ of the collateral. An assumed ________ allows the cash flow to be projected.

Question

Quizplus · Accepted Answer

The precise amount of the principal in each period is not known because it depends on the actual prepayment rate of the collateral, which cannot be predicted with certainty. An assumed prepayment rate does allow for cash flow projections, but it is not the same as knowing the exact amount of principal payments in each period. The answer choices C and D mention projected prepayment rates, which are still not certain, and refer to different prepayment speed measures than the PSA speed, which is the one mentioned in the question stem.

Although the Priority Rules for the Disbursement of the Principal