prepayment risk

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Prepayment Risk

The risk that a borrower will repay a loan before its maturity, depriving the lender of future interest payments. Prepayment risk is most important for callable bonds, in which the issuer may repay the principal and cease paying coupons after a certain date, and mortgage-backed securities, in which the mortgage holder may refinance his/her mortgage, which will result in the security holder losing future interest. Some callable bonds and mortgage-backed securities have structures embedded within them to reduce prepayment risk. See also: Collateralized mortgage obligation, Yield-to-worst, Yield-to-maturity.

prepayment risk

The risk to a lender that part or all of the principal of a loan will be paid prior to the scheduled maturity. For a bondholder, prepayment risk refers to the possibility the issuer will redeem a callable bond prior to maturity. Prepayments generally occur when market rates of interest decline following the loan origination. Prepayment generally results in reduced cash flow for a bondholder when proceeds from the redemption are reinvested at a reduced interest rate. Also called call risk.

prepayment risk

See option risk.

References in periodicals archive ?
In combining these previously distinct offerings, FIS has unlocked the necessary elements required to accurately assess default and prepayment risks within real estate loan portfolios, according to Greg Whitworth, president of the FIS Loan Portfolio Solutions Division.
The FHLBNY manages the funding, interest rate, liquidity and prepayment risks.
FASITs also provide a mechanism for managing interest-rate and prepayment risks.
Active management is also necessary to protect the fund against prepayment risks.
Asset-backed and mortgage-backed securities are generally subject to higher prepayment risks than other types of debt securities, which can limit the potential for gain in a declining interest rate environment and increase the potential for loss in a rising interest rate environment.
This estimation works well as long as the mortgages in the pool have homogenous prepayment risks and the anticipated prepayments can be modeled reasonably well.
The creation of excess servicing undoubtedly subjects a company to prepayment risks.
Under the MPF Program, the local lender manages the credit risk and customer relationship, while the Bank manages the funding, interest rate, and prepayment risks.
Therefore, prepayment risks can be avoided by pooling in Freddie Mac Gold ARC PCs.
Going well beyond what may be derived from a static scenario analysis of prepayment risks, our approach allows the sharp-penciled servicer to evaluate the probability distribution of prepayment risks in his or her portfolio.
Best believes the prepayment risks inherent in these interest-sensitive investments expose the company to earnings volatility; however, Protective's prudent underwriting strategy and refined asset/liability management procedures have thus far mitigated this volatility.