Final answer:
A conditional prepayment rate (CPR) of 8% refers to the percentage of outstanding mortgage loans that are expected to be prepaid within a given period of time. It measures the rate at which borrowers are expected to pay off their mortgages earlier than the scheduled maturity date.
Step-by-step explanation:
A conditional prepayment rate (CPR) of 8% refers to the percentage of outstanding mortgage loans that are expected to be prepaid within a given period of time. In other words, it measures the rate at which borrowers are expected to pay off their mortgages earlier than the scheduled maturity date.
For example, if a pool of mortgages has a CPR of 8%, it means that 8% of the outstanding mortgage balance is expected to be prepaid each year. This can happen due to various reasons, such as borrowers refinancing their mortgages at lower interest rates or selling their homes.
Knowing the CPR is important for investors in mortgage-backed securities, as it helps them estimate the cash flow and duration of their investments and make informed decisions based on the projected prepayment behavior of borrowers.