Prepayment Privilege

AAA

DEFINITION of 'Prepayment Privilege'

The right given to a debt holder to pay all or part of a debt prior to its maturity or ahead of schedule, usually without risk of penalty. Prepayment privileges are often elements of such debts as mortgages or automobile loans. They are in opposition to a prepayment penalty, which is the amount set by the lender as a penalty to the debtor for paying off a debt prior to its maturity in order to recoup a portion of the lost interest the lender had planned to earn.

INVESTOPEDIA EXPLAINS 'Prepayment Privilege'

Fixed-income securities that incorporate prepayment privileges are considered riskier to the debt holders because they are not certain as to when they will receive the cash flow of incoming funds. Prepayment tends to occur when interest rates are low and mortgage refinancing is viewed as favorable.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  3. Prepayment

    The satisfaction of a debt or installment payment before its ...
  4. Prepayment Penalty

    A clause in a mortgage contract that says if the mortgage is ...
  5. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  6. Conditional Prepayment Rate - CPR

    A loan prepayment rate that is equal to the proportion of the ...
RELATED FAQS
  1. How is depreciation related to the carrying value of a tangible asset?

    Depreciation is related to the carrying value of a tangible asset in that the latter is the original cost of the tangible ... Read Full Answer >>
  2. What's the difference between the prime rate and the repo rate?

    The prime rate is used as the index for rates offered in consumer lending and loan products. When government central banks ... Read Full Answer >>
  3. What is the difference between carrying value and market value?

    The difference between carrying value and market value is that the carrying value of an asset is the original cost less the ... Read Full Answer >>
  4. What metrics can be used to evaluate companies in the banking sector?

    When investment professionals evaluate banks, they are confronted with bank-specific issues such as to how to measure debt ... Read Full Answer >>
  5. What should ordinary borrowers know about the prime rate?

    The prime rate is set by governments and used as the index for consumer lending rates. Banks add a markup to the prime rate. ... Read Full Answer >>
  6. What is a geometric mean in statistics?

    In statistics there exists a wide variety of metrics such as median, standard deviation, arithmetic mean, power mean, geometric ... Read Full Answer >>
Related Articles
  1. Home & Auto

    The Benefits Of Mortgage Repayment

    Buying a home may be the biggest debt you'll ever incur. Learn why you should retire it sooner, rather than later.
  2. Retirement

    The Indiana Jones Guide To Getting Ahead

    Follow Indy's advice to conquer the obstacles blocking your path to financial well-being.
  3. Mutual Funds & ETFs

    Top 4 High-Yielding Preferred Stock ETFs

    ETFs offer diversification, a clear advantage. Preferred stock ETFs offer even more.
  4. Investing Basics

    What is a "Coupon"?

    In the financial world, “coupon” represents the interest rate on a bond.
  5. Stock Analysis

    Is it Time to Buy Floating Rate Bonds?

    The Fed’s awaited interest rate hike could finally be at hand. Are floating rate bonds the way to go?
  6. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  7. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  8. Investing Basics

    Treasury Inflation-Protected Securities (TIPS)

    Treasury inflation-protected securities are treasury securities that make adjustments for inflation as reflected in the Consumer Price Index.
  9. Fundamental Analysis

    What is Quantitative Analysis?

    Quantitative analysis refers to the use of mathematical computations to analyze markets and investments.
  10. Economics

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.

You May Also Like

Hot Definitions
  1. Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment ...
  2. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  3. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  5. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  6. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
Trading Center