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:

Highly Marketable

Describes assets or products that are easily sold or traded in the market due to high demand or liquidity.

Very Low Risk

Investments or financial strategies characterized by minimal potential for financial loss, typically associated with low returns.

Debt Security

Debt security is a financial instrument representing a loan made by an investor to a borrower, typically corporate or governmental, where the borrower promises to return the principal and pay periodic interest payments.

Fixed Stream

A series of fixed payments over a period of time, such as those from bonds or annuities.