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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

prepayment risk

See option risk.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
"It's a bit of an unknown, but for example, [with loans] we'll try and restrict the pre-payment risk. We can also constrain the ratings, the term of loans, and some of the conditions.
Why do people care about pre-payment risk? On the simplest level, slow pre-payments mean that the investor does not get his money back as quickly, and the value of the bond declines.
However, the average spread after correcting for the pre-payment risk or the OAS should remain very stable.
Here, the risk on the loan has been parceled out into interest-rate risk, assumed by the borrower; credit risk, assumed by the government; and pre-payment risk, assumed by the investor.
It raises a variety of risks which change over time and are notoriously difficult to manage, including credit, interest rate and market risk and mortgage pre-payment risks. The welfare consequences of these risks are particularly important because house buying is usually the largest financial transaction households make, and the cost of housing means that they cannot usually hedge their exposures to these risks.