prepayment risk

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 ?
Net lease investments may also benefit from rising rents over time, long durations with no prepayment risk and the safety and collateral of the physical property itself.
In particular, Denmark relies very heavily on capital markets for funding residential mortgages, transferring interest rate risk and prepayment risk to fixed-income investors in a way that is similar to U.S.
In addition to AtClose, Visionet products include production lead management, product recommendation engines, channel and broker profitability, post-close compliance automation, loan boarding and special loan setup, escrow float and shortage management, prepayment risk modeling, default risk analysis, loss estimation and tracking, and REO.
Eisfeldt, University of California, Los Angeles, and NBER, "Prepayment Risk and Expected MBS Returns" (NBER Working Paper No.
Compared to corporate bonds, however, these securities are more vulnerable to prepayment risk, which is a function of the underlying collateral, according to the report.
Treasuries, but pay-ups on Agency specified pools increased as interest rates fell and market perception of prepayment risk rose.
government, but they have prepayment risk. The securities are backed by home mortgages and homeowners can pay of their mortgages at any time, so the duration is not fixed.
Similarly, MBSs issued to fund household mortgages are less safe than Treasuries because of the substantial prepayment risk involved.
Financial risk includes: credit risk; market risk and rate of return risk; liquidity risk; settlement and prepayment risk; and displaced commercial risk <p>Credit risk Credit risk defined as "the risk of counterparty failure to meet their obligations in a timely manner or in the event of a deterioration of the borrower's repayment capacity" is the most common source of risk in Islamic banks as well as in the conventional banks.
Using a loan-level model, we empirically evaluate the effect of market changes in interest rate exposure on prepayment risk for an automobile loan portfolio.
The technical term lenders use to capture this costly inconvenience is prepayment risk. In the end, it is the borrower who compensates the lenders and investors for the prepayment risk in the form of higher interest rates.