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 ?
Better management of both default and prepayment risks also would make it easier for lenders to approve more borrowers.
(5) Over the years, several studies using loan-level data have investigated the economic drivers of default and prepayment risks on residential mortgages See Kau et al ( 1992, 1995); Deng ( 1997); Deng and Quigley (2002); Deng, Quigley, and Van Order 12000); Pavlov (2001); Calhoun and Deng (2002); and Ambrose and Sanders (2003).
Unlike other industries, banks also face prepayment risks. (3) Although there is no direct measure for the prepayment risk premium, residuals from a regression model that uses real estate, maturity, and default risk factors to explain variations in risk premiums contained in mortgage rates may be able to quantify the prepayment risk premiums.
FASITs also provide a mechanism for managing interest-rate and prepayment risks. Portfolios of debt instruments that have defined patterns of principal amortization can be pooled with instruments that have erratic principal amortization in order to smooth interest earnings and make it easier to track and maintain a benchmark rate of return within a defined duration range.
Thus, decisions about continuing to hold debt securities will not be affected by changes in market interest rates or security prepayment risks. Trading securities are those held for current resale.
Most of these cash flows are subordinate, however, in the sense they will first bear any credit, interest rate, and prepayment risks associated with the securitized assets.
Prices of Treasury notes and bonds also were boosted by municipal defeasance activity and by perceptions of heightened prepayment risks in mortgage-backed securities.
Securities that might be sold in response to changes in interest rates, changes in prepayment risks, increases in loan demand or similar factors could not be considered as "held to maturity" under the proposal.
Active management is also necessary to protect the fund against prepayment risks. To do this, an experienced manager will assess many factors, such as the age of the ARM pool and the location and size of the mortgages.
Mortgage Partnership Finance allows lenders to make underwriting decisions and retain credit risk while shifting interest-rate and prepayment risks to a larger financial institution.
During the summer of 2007, subprime mortgage funding liquidity disappeared in part because subprime lenders and mortgage investors lacked the data to accurately reassess and reprice credit, collateral and prepayment risks. Many lenders that could not internally fund or sell their loans went bankrupt.
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.