Bonds: Simplified
What CPR means
CPR stands for conditional prepayment rate. It estimates the percentage of the remaining mortgage balance that prepays over a year, after scheduled principal is considered. A higher CPR means principal comes back faster, weighted average life usually shortens, and the investor has more reinvestment risk.
What PSA means
PSA is a benchmark prepayment curve. At 100 PSA, the benchmark starts at 0.2% CPR in month 1, rises by 0.2 percentage point each month, reaches 6% CPR at month 30, and stays at that plateau after month 30. A 200 PSA assumption is twice that benchmark path; 50 PSA is half of it.
When to use each
Use CPR when you want a direct, constant speed assumption or when comparing a set of rate shock scenarios. Use PSA when seasoning matters and you want a conventional ramp for a newer or seasoned pool. Bonds: Simplified supports both PSA and CPR modes in its MBS workflow, including scenario tables and cash flow charts.
Why the choice matters
Prepayment speed changes principal timing. Faster speeds can pull principal forward, reduce weighted average life, and cap upside when rates fall. Slower speeds can extend the life of the security when rates rise. That is why PSA and CPR flow directly into MBS prepayment speed, effective duration, and rate shock analysis.