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Prepayment Risk (MBS)

The uncertainty that cash flows in a Mortgage Backed Security will be affected because the borrowers (mortgagors) will accelerate their principal payments in order to refinance when interest rates drop. Usually prepayments are more prevalent when interest rates are high which is not to the investor’s advantage as they are receiving interest payments based on the amount of principal. Prepayments also shorten the maturity of the investment.


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Portfolio valuation and risk analytics for multi-asset derivatives and fixed income.