4.3.3 Prepayment Rules
This module describes the procedure for working with and managing Prepayment Rules. One of the major business risks faced by financial institutions engaged in the business of lending and borrowing is prepayment and early redemption risk. Prepayment risk is the possibility that borrowers might choose to repay part or all their loan obligations before the scheduled due dates. Prepayments can be made by either accelerating principal payments or refinancing. Prepayments cause the actual cash flows from a loan to a financial institution to be different from the cash flow schedule drawn at the time of loan origination. A Prepayment Rule contains methodologies to model the prepayment behavior of various amortizing instruments and quantify the associated Prepayment Risk.
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