[Verse 1] Sarah bought a mortgage bond, thought she'd hold it thirty years But the borrowers had other plans that brought her to tears When rates dropped down, they all rushed out to refinance their loans Left Sarah with her principal back, but income dreams were blown [Chorus] Prepayment risk will catch you when you least expect it to CPR tells the story of what borrowers will do Single Monthly Mortality, SMM shows the rate PSA models help predict your investment's fate When they pay early, early, your returns fade away Prepayment risk, prepayment risk, will steal your yield today [Verse 2] Conditional Prepayment Rate measures yearly speed How fast the mortgages will pay, it's what investors need But monthly is more useful so we calculate SMM Single Monthly Mortality shows the monthly mayhem [Chorus] Prepayment risk will catch you when you least expect it to CPR tells the story of what borrowers will do Single Monthly Mortality, SMM shows the rate PSA models help predict your investment's fate When they pay early, early, your returns fade away Prepayment risk, prepayment risk, will steal your yield today [Bridge] PSA assumes the baseline, one hundred percent speed Month one starts at zero-two, increasing what you need By month thirty it reaches six percent CPR This benchmark helps investors know how bonds might fare [Verse 3] When interest rates are falling down, prepayments start to soar Homeowners rush to refinance and walk right out the door But when the rates are climbing up, they're likely gonna stay Your mortgage bonds live longer but at lower rates they pay [Chorus] Prepayment risk will catch you when you least expect it to CPR tells the story of what borrowers will do Single Monthly Mortality, SMM shows the rate PSA models help predict your investment's fate When they pay early, early, your returns fade away Prepayment risk, prepayment risk, will steal your yield today [Outro] So remember when investing in those mortgage-backed securities Prepayment risk is lurking with its painful certainties CPR and SMM, PSA models too Will help you understand what those homeowners might do
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