Conditional Prepayment Rate - CPR
Since banks and other lenders frequently sell their loan pools of mortgages and student loans, it can throw off their calculations if their borrowers pay back part of their loans ahead of time. So they need to calculate what percent of the loans might be prepaid based on past history of similar loans and the future health of the economy.
This is known as the conditional prepayment rate (CPR). It’s expressed as a percentage, such as: 5% of the principal of the bank’s pool of student loans is expected to be prepaid each year. If the CPR rate is high, it means the borrowers are prepaying their loans faster. This leads to a lower rate of return when the bank goes to sell that pool of loans, even though they're lower risk. CPRs can also occur when a bond issuer pays off a bond early to its investors in order to refinance at a lower interest rate.
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Finance: What are the Major Risks in Own...1 Views
Finance allah shmoop What are the major risks in owning
bonds Okay so first thing about risk Like if you're
one of those people who worries about asteroids dinosaur inhumanity
Well then really the best place for your savings is
probably in a certain aura casper Or you know whatever
mattress brand you like Yeah go stuff those twenties into
their sleep on them And well we guess you pray
a lot Well if you have a bit more tolerance
for risk than buns air calling for you Historically most
funds are safe They boringly go along and pay their
interest and principal and investors get their five point two
eight nine seven percent returns or whatever the number is
And that's it No heroes no goats just interest payments
and peace So the bottom quartile of bonds i e
V e riskiest quarter of them is still way safer
than almost any equity or stock So the risks in
bond ownership kind of come from a different place not
necessarily from bankruptcy and the bonds not paying And yes
there exists a risk numeral you know in the company
or municipality or state going bankrupt Hello illinois California We're
looking at you and not paying the interest they oh
but that's an obvious risk and really rare in the
scheme of things Like in all the bonds issued its
some number in the very low zero point something percentages
of bonds that actually don't finally pay And this number
varies highly by era that is in the mortgage crisis
of a wave no Nine while there was a huge
spike in the number of bond delinquencies But in normal
eras where the world isn't in fact teetering on the
edge of bankruptcy a bond default is really rare So
the risk in bond ownerships more about the opportunity cost
of not owning stocks huh How's that go Well historically
the stock market is compounded it seven eight nine ten
percent a year and it doubles in value every seven
eight nine ten years Something like that Bonds with consummately
way less risk not surprisingly offer away less reward and
frankly poor tax structure because bond interest is tax at
ordinary income and stock appreciation is intact until you sell
it And even then it's tax at long term gain
rates usually so bonds compounded about half the rate of
the stock market or stocks or less obviously depending on
how much risk those bonds carrie right relative to where
we are in the market cycle and so on But
if you're feeling frisky and you buy junk bonds or
high risk or high yield bonds well there are other
risks beyond bankruptcy or looking over your shoulder and watching
the stock market boom While you're getting only eight percent
in year interest pre tax on your bonds right That
risk calls that is bond's yielding a whopping eight percent
have the risk that they get called early and refinanced
for only five percent The transaction makes a ton of
sense for the company who issued those high priced bonds
It stays a mil three percent a year on big
dollar amounts and that could be huge like taking a
four hundred million dollars of debt And instead of paying
eight percent on that well you're only paying five percent
or something like that right But the risk then extends
to the investor who thought they were buying a nice
set of cash flows at eight percent on i'll say
the hundred grand they invested or they'd get eight grand
a year in interest on that investment bonds only to
wake up one day with their hundred grand re funded
maybe with a grand or two in premium or tip
to say thank you for the short ride pal with
the company then offering the same risk bonds for just
five grand a year in bond rent money instead of 00:03:26.21 --> [endTime] eight So yeah