Check all that is true about the SDA default model: If you know the beginning pool...

Check all that is true about the SDA default model:

		If you know the beginning pool balance and assume a 200% SDA, you can calculate what the CDR is for each month
		SDA stands for standard default assumption
		If you know the beginning pool balance and assume a 200% SDA, you can calculate what the CDX is for each month
		Under the 100% SDA assumption no one defaults when their mortgage is a few months away from being paid out
		SDA function for defaults takes the same shape as a PSA function for prepayments
		The SDA takes into account maturity of the mortgage

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Answer:

The true statements are 1 and 2

The fourth statement is false since default rate after a month is 120 which is low (0.03%), but it is not zero (no one defaults). Statement 1 is true since the SDA formula offers a monthly default rate which may be converted into the CDR. Statement 5 is false because SDA assumes that the defaults in the end period of the loan are very low whereas PSA assumes pre-payments remain at six percent till the maturity. SDA actually stands for Standard Default Assumption. Statement 3 is false since the SDA offers only the conditional default rate but the outstanding balance of the pool is influenced by the pre-payment which is actually not provided. Also, statement 6 is false since SDA takes into consideration the month since its origination.

jeff jeffy answered 1 year ago

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