Prepayment Risk
Definition
What is Prepayment Risk?
The risk that borrowers repay principalThe original amount of money invested or lent, excluding later returns. earlier than expected, changing an investmentAn asset or commitment of money made with the expectation of future income, growth, or both.'s cash flows and return.
Example in practice
How This Looks in Practice
Homeowners refinance after rates fall, returning mortgageA loan secured by real property. principal early.
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Related Terms
Market Risk
The possibility of loss because broad market prices or rates move against an investment.
Risk TermsCredit Risk
The possibility that a borrower or issuer will fail to make promised payments or suffer a downgrade.
Risk TermsInterest-Rate Risk
The possibility that changing market interest rates will reduce an investment's value or income appeal.
MiscellaneousBusiness Day
A day on which relevant financial institutions and markets are open for normal processing.