Securitisation glossary by Vinod Kothari
Prepayment Risk - Is the potential loss due to prepayment by an obligor. The SPV may either pass through the prepaid amounts to investors thus resulting into faster payment of principal than expected, and reduced income over time, or if the SPV were to reinvest this money, the reinvestment may not produce rate of return as in the underlying receivables. Hence, prepayment is viewed as a risk in securitisation, though sometimes, prepayment penalties may more than undo the damage.
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