Wave

Free Cool Articles
Helping YOU Read Your Way to Success!

cool
  
Resources For YOU

Home
Famous Quotes
GET BETTER ezine
Rajen's Blog Menu
Financial Planning
Goal-Setting
Time Management
All Articles
Gift Centre
Resource Centre
Return Home                                       Financial Planning                 FREE ezine

 

FP Article 15.15 (To sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

Investment Risk - Prepayment Risk

by Rajen Devadason

Ownership often proves more profitable than loanership for two reasons: Equities have a higher risk premium than bonds, and they don't run the risk of being prepaid out of existence just when things start to get interesting!

Rajen Devadason

  Prepayment risk is a type of investment risk that can take on many different shapes and sizes. Let me explain.

For instance, banks are open to prepayment risk when homeowners take advantage of lower costing mortgages to repay their existing home loans. Even retail investors aren't spared exposure to some form of prepayment risk.

Let's say you invested in the loan stock of a company that permits flexible redemption terms.

 

 

 

 

 

 

 



We'll imagine for the sake of this exercise that you bought 1,000 loan stock of a company known as Loophole Seeker for $1 apiece. It has, let's imagine, a coupon rate of 8%.

Initially, you are very happy with your seemingly safe, secure investment. 

This is an article explaining prepayment risk. I hope you enjoy reading it. But if it isn't what you're looking for, you're welcome to search for something that better meets your needs. Thank you for allowing me to serve you.

Rajen Devadason

Google
 
Web www.FreeCoolArticles.com
www.RajenDevadason.com

 

 

 

 

 

 

 

 


 

But let's then suppose that six months down the road, interest rates start to fall.

Initially, you would appear to have reason to celebrate because the attractiveness of your loan stock has risen; this should cause its price to rise.

But what if the company's board of directors then decides that since interest rates are falling, it would be wiser for the company to borrow cheaper money from banks and redeem your loan stock early, at $1.

In such a situation, you would have suffered a realised prepayment risk.

If you'd like to continue to learn more about other types of investment risk, here's additional information for you...

15 Types of Investment Risk (OR, to sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

1. Borrowing Risk

2. Company Risk

3. Credit Risk

4. Currency Risk

5. Diversification Risk

6. Industry Risk

7. Inflation Risk

8. Interest Rate Risk

9. Liquidity Risk

10. Lost Opportunity Risk

11. Manager's Risk

12. Market Risk

13. Market Timing Risk

14. Political Risk

15. Prepayment Risk

 

 

© Rajen Devadason

Google
 
Web www.FreeCoolArticles.com
www.RajenDevadason.com

 

 

 

 

 

   Useful Resources
  
Immediately downloadable ebooks &
    eReports.
Who is Rajen Devadason?
Author, consultant and speaker.
Learn about him here.
 

 

 

Return Home                                       Financial Planning

 

 

 

  
 

Related Tools
to Help You
with D-I-Y

Financial Planning

sunset

 

 

If you find these articles helpful, thought provoking or action prodding, youíre welcome to tell others of this valuable resource. You may do so by inviting them to visit http://www.FreeCoolArticles.com

Also, if youíre particularly serious about self-improvement, visit Rajenís Resource Centre for excellent tools aimed at helping you achieve your highest potential in life!

 

Rajen Devadason, CEO RD WealthCreation Sdn Bhd & RD Book Projects
349, Desa Rasah, Jalan Bayan 7, 70300 Seremban, NS, Malaysia
Tel/Fax: +606 632 8955

 
cool