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.
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