Hi all, Can somebody explain me these the concept of prepayment and how is it different/similar from callable options in bonds. Many thanks S
Prepayment applies to mortgage backed securities. This is a similar to a call risk in the sense that when interest rates get lower people tend to refinance their mortgages and pay off their current higher interest mortgage, much like a company would call a higher interest bond and refinance by issuing new bonds at a lower rate.
Except they are not allowed to payback at call the higher interest rate bond by issuing proceeds obtained from lower interest instruments.
they’re not allowed only if the bond is nonrefundable, correct?
map1 Wrote: ------------------------------------------------------- > Except they are not allowed to payback at call the > higher interest rate bond by issuing proceeds > obtained from lower interest instruments. Only if there is a non-refunding provision in the bond indenture
yes