What Is Prepayment Risk? How Does Prepayment Risk Affect the Cash

question 17

Essay

What is prepayment risk? How does prepayment risk affect the cash flow stream on a fully amortised mortgage loan? What are the two primary factors that cause early payment?

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Definitions:

Mental Shortcuts

Cognitive strategies or heuristics that simplify decision making by using limited information, allowing for faster judgements but sometimes at the cost of accuracy.

Self-Serving Bias

A cognitive bias that involves individuals attributing their successes to internal factors while attributing failures to external factors.

Information Presentation

The method or format in which information is organized and provided to an audience or users.

Disconfirmatory Information

Information or evidence that contradicts or refutes one's beliefs or assumptions.