Prepayment Model

Filed Under » , ,
Dictionary Says

Definition of 'Prepayment Model'

A model used to estimate the level of prepayments on a loan portfolio that will occur in a set period of time, given possible changes in interest rates. Prepayment models are based on mathematical equations and usually involve the analysis of historical prepayment trends. Prepayment models are generally used to value mortgage pools such as GNMA securities or other securitized debt products.

As interest rates rise, prepayment models factor in fewer prepayments. If interest rates fall, the opposite effect is accounted for, as more people will refinance their loans.

Investopedia Says

Investopedia explains 'Prepayment Model'

One of the most notable prepayment models is the PSA Prepayment Model by the Securities Industry and Financial Markets Association. The PSA model assumes increasing prepayment rates for the first 30 months and then constant prepayment rates afterward.

The standard model, referred to as 100% PSA or 100 PSA, assumes that prepayment rates will increase by 0.2% for the first 30 months until they peak at 6% in month 30. 150% PSA would assume 0.3% (1.5 x 0.2%) increases to a peak of 9%, and 200% PSA would assume 0.4% (2 x 0.2%) increases to a peak of a 12% prepayment rate.
Search results for

'Prepayment Model'

  • The Risks Of Mortgage-Backed Securities

    http://www.investopedia.com/articles/mortgages-real-estate/08/weighted-average-mbs.asp
    ... PSA Standard Prepayment Model The most commonly used prepayment rate assumption
    is the standard prepayment experience offered by the Public Securities ...

  • CFA Level 1 Study Guide - Fixed Income Investments - Call and ...

    http://www.investopedia.com/exam-guide/cfa-level-1/fixed-income-investments/call-prepayment-risk.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • CFA Level 1 Study Guide - Portfolio Management - The Capital Asset ...

    http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/capm-capital-asset-pricing-model.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • CFA Level 1 Study Guide - Equity Investments - The Dividend ...

    http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/ddm-dividend-discount-model.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • CFA Level 1 Study Guide - Equity Investments - Developing Input ...

    http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/ddm-dividend-discount-model-input%20estimates.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • CFA Level 1 Study Guide - Equity Investments - DDM and the ...

    http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/ddm-dividend-discount-model-earnings-multiplier.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • CFA Level 1 Study Guide - Corporate Finance - Setting Dividends ...

    http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/setting-dividends.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • CFA Level 1 Study Guide - Fixed Income Investments - Mortgage ...

    http://www.investopedia.com/exam-guide/cfa-level-1/fixed-income-investments/mbs-mortgage-backed-securities.asp
    ... 13.1 Introduction; 13.2 Security Valuation; 13.3 The Dividend Discount Model (DDM); ...
    and Financing Purchases; 14.9 Interest Rate Risk; 14.10 Call and Prepayment Risk ...

  • 3 Bonds You May Have Never Heard Of

    http://www.investopedia.com/articles/bonds/09/lesser-known-bonds.asp
    ... With consumer-backed loans, particularly with mortgages, the rate of prepayment
    on the loan is rather predictable ... Financial Companies Need A New Model. ...

  • Rental Properties: Cash Cow Or Money Pit?

    http://www.investopedia.com/articles/mortgage-real-estate/09/property-valuation-basics.asp
    ... appropriate time to sell because financing structures, such as prepayment penalties,
    can ... selling, it is possible to produce a valuation model accurate enough ...

Related Articles

Partner Links