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?

---

Definitions:

Overhead Applied

Refers to the amount of manufacturing overhead costs assigned to individual jobs based on a predetermined rate, representing the indirect costs associated with production.

Actual Overhead Costs

The real expenses incurred for overhead in a specific period, as opposed to budgeted or estimated costs.

Job Costing System

An accounting methodology used for assigning manufacturing costs to individual units or projects, tracking expenses accurately for each job.

Allocation Bases

Criteria or standards used to distribute overhead costs among various cost objects, based on factors like time, machine hours, or labor costs.