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Prepayment

• A payment made ahead of the scheduled payment date.

• Is an additional principal amount in excess of the required amount paid by the mortgagor to reduce the open mortgage balance.

 
 Embedded terms in definition
 Mortgage
Mortgagor
Payment date
Principal amount
Principal
 
 Referenced Terms
 Break even payment rate: The Prepayment rate of a MBS coupon that will produce the same CFY as that of a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower than the benchmark coupon the lowest prepayment rate that will do so.

 Bullet: Is a type of credit security which repays the entire principal on the maturity date. Prior to the maturity or Prepayment of the bond, interest payments are to be made in accordance with the payment schedule. Treasury and Corporate bonds pay off in lump sum principal amounts whereas many mortgages pay off on an amortization basis.

 Burnout: Is a phenomenon in the mortgage market. It represents the tendency of pools to become less sensitive to interest rate declines with the passage of time. While there may have been a surge in Prepayments due to declining interest rates, the remaining mortgages do not prepay as quickly as the previous ones in the pools. It is implied that these remaining mortgages are less vulnerable to further accelerated prepayment risks.

 Collar: Is the combination of a long Cap position and a short Floor position. It is sometimes called a range forward or a fence. Generally, it is structured so that the net cost of the collar is zero or close to zero. This means that the debit expense for the long cap premium is offset by the credit received for the short floor premium. This term is also used to define the Prepayment speed range for a credit instrument.An upper and lower limit on the interest rate on a floating-rate note.A Collar also refers to a combination of cap (call option on interest rates) and floor (put option on interest rates). An investor who holds a collar is in effect protected from interest rate increases or interest rate declines.Buy a call and sell a put. If a firm buys jet fuel and wants protection against jet fuel increases, it can buy a call option with a higher exercise price than the current price and sell a put option (with lower exercise price than the current price) and limit the price fluctuations to be in between the exercise price of the call and the exercise price of the put.

 Collateralized mortgage obligation: Is a complex bond structure which reallocates interest and principal payment streams. These tranches, which are often designated as A to Z pieces or securities, are engineered from mortgage backed securities used as the underlying collateral. Collateralized Mortgage Obligations come in many shapes and sizes and are often viewed as unique constructions. Some of the more commonly named tranches are: Interest Only, Principal Only, Floater, Inverse Floater, Planned Amortization Class, Support, Scheduled, Sequential, Targeted Amortization Class, and Z or Accrual Bond. Often, many of these securities contain option characteristics. Related structures are Collateralized Bond Obligations and Collateralized Loan Obligations.Abbreviated CMO. A security backed by a pool of pass-throughs, structured so that there are several classes of bondholders with varying maturities, called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through securityA Collateralized Mortgage Obligation (CMO) is a vehicle that repackages the cashflows in a way that redistributes Prepayment risk.

 
 Related Terms
 Fha prepayment experience
Prepayment option
Prepayment penalty
Prepayment risk
Prepayment speed
Prepayment window
Psa prepayment
Zero prepayment assumption

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