Explain Prepayment Patterns and Security Prices?
The lending process is subjected o interest rates changes which may trigger prepayment of the principal amount exposing the lender to prepayment risk. To take advantage of the current market situation the borrower can use prepayment of the principal amount. General lending business scenarios is historical data of the various type of borrower and the way they have completed the entire loan duration. The borrower uses the option to prepay the loan amount against paying some charges to do so. After analysis of such historical data, a model will generate patterns of prepayments that a borrower may fall into. This output processed for the borrower can be adjusted to avoid prepayment risk.
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