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Efficient Valuation of Prepayment and Default Risky Securities Serge Slavinsky Scotia Capital (416) 945-4094 Work: serge slavinsky scotiacapital.com Personal: ses049 gmail.com Edwin H. Neave Queen's.

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The CPR is a proportion of a loan pool's principal that is assumed to be paid off ahead of time in each period. It measures prepayments as a percentage of the current outstanding loan balance. It is always expressed as a percentage, compounded annually.

The prepayment risk is highest for fixed-income securities, such as callable bonds and mortgage-backed securities (MBS). Bonds with prepayment risk often have prepayment penalties.

To mitigate the prepayment risk faced by investors in mortgage-backed securities, prepayment penalties are commonly imposed on homeowners who repay their home loans earlier than expected.

In the case of a mortgage-backed security (MBS), prepayment is perceived as a financial risk—sometimes known as "call risk"—because mortgage loans are often paid off early in order to incur lower interest payments through cheaper refinancing.

Generally, the penalty is a straightforward declining payment schedule. For example, a 5-4-3-2-1 schedule for a 5 year loan term would make the borrower responsible for paying a penalty of 5% of the outstanding balance if prepaying the loan in the first year, 4% in the second year, 3% in the third year, and so on.

Risks of Mortgage Pass-through Securities Prepayments are unpredictable, but directionally they increase as interest rates fall and decrease as interest rates rise. Prepayment risk is form of reinvestment risk, as the investor will be forced to re-invest at lower interest rates.

Prepayment lockout and defeasance are the strongest forms of prepayment protection.

To mitigate the prepayment risk faced by investors in mortgage-backed securities, prepayment penalties are commonly imposed on homeowners who repay their home loans earlier than expected.

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Form Packages
Adoption
Bankruptcy
Contractors
Divorce
Home Sales
Employment
Identity Theft
Incorporation
Landlord Tenant
Living Trust
Name Change
Personal Planning
Small Business
Wills & Estates
Packages A-Z
Form Categories
Affidavits
Bankruptcy
Bill of Sale
Corporate - LLC
Divorce
Employment
Identity Theft
Internet Technology
Landlord Tenant
Living Wills
Name Change
Power of Attorney
Real Estate
Small Estates
Wills
All Forms
Forms A-Z
Form Library
Customer Service
Terms of Service
DMCA Policy
About Us
Blog
Affiliates
Contact Us
Privacy Notice
Delete My Account
Site Map
All Forms
Search all Forms
Industries
Forms in Spanish
Localized Forms
Legal Guides
Real Estate Handbook
All Guides
Prepared for You
Notarize
Incorporation services
Our Customers
For Consumers
For Small Business
For Attorneys
Our Sites
US Legal Forms
USLegal
FormsPass
pdfFiller
signNow
airSlate workflows
DocHub
Instapage
Social Media
Call us now toll free:
1-877-389-0141
As seen in:
  • USA Today logo picture
  • CBC News logo picture
  • LA Times logo picture
  • The Washington Post logo picture
  • AP logo picture
  • Forbes logo picture
© Copyright 1997-2025
airSlate Legal Forms, Inc.
3720 Flowood Dr, Flowood, Mississippi 39232