alivas9160 alivas9160

19-12-2022
Business

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if an investor's portfolio is significantly weighted with mortgage-backed securities, she is most concerned with:

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abhinavjh321 abhinavjh321

23-12-2022

if an investor's portfolio is significantly weighted with mortgage-backed securities, she is most concerned with prepayment risk.

What is prepayment risk?

Prepayment Risks are the dangers of not receiving all the interest payments due on a mortgage loan or fixed income security as a result of the borrower's early principal repayment. Prepayment Risk causes the loss of possible interest payments and the early discharge of the borrower's loan obligations. Mortgage borrowing carries the most risk because these loans are typically taken out for longer terms—between 15 and 30 years—and from the borrower's point of view, it makes sense to repay early in order to avoid paying high interest rates because of the lengthy terms of such loans. Prepayment risk, to put it simply, is the risk that borrowers take as interest rates decrease.

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