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Raheim J. Cancel Report. Create a new account. Log In. Know what is CPR? Got another good explanation for CPR? Don't keep it to yourself! Add it HERE! Still can't find the acronym definition you were looking for? Use our Power Search technology to look for more unique definitions from across the web! Search the web. Citation Use the citation options below to add these abbreviations to your bibliography. Powered by CITE. Food and Drug Administration. Flour and Drug Administration.
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Creating Positive Relationships Community. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A conditional prepayment rate CPR is an estimate of the percentage of a loan pool's principal that is likely to be paid off prematurely.
The estimate is calculated based on a number of factors, such as historical prepayment rates for previous loans similar to the ones in the pool and future economic outlooks. These calculations are important for investors in evaluating assets like mortgage-backed securities or other securitized bundles of loans. The CPR can be used for a variety of loans. Pools of mortgages, student loans, and pass-through securities all use the CPR as estimates of prepayment. Typically, the CPR is expressed as an annual percentage.
The CPR helps investors anticipate prepayment risk , which is the risk involved with the premature return of principal on an income-producing security. In simple terms, when a borrower pays a portion of their loan's principal off early that portion stops incurring interest and investors in that debt will no longer receive interest payments from it.
The risk of prepayment is most prevalent in fixed-income securities such as callable bonds and mortgage-backed securities MBSs. The higher the CPR, the faster the associated debtors are likely to prepay on their loans. A high prepayment rate means the debts associated with the security are being paid back at a faster rate than the required minimum. While this indicates that the investment is lower risk, since the amount that's owed is being paid back, it also means that the overall return on the investment is likely to be lower.
The CPR can help investors gauge the likely return on an investment and their prepayment risk, especially in changing economic conditions. For example, in a time of declining interest rates, homeowners often prepay their mortgages to refinance them at a lower rate.
When that occurs, the mortgage-backed security that their mortgage is packaged into may be paid back sooner than expected, with the proceeds released back to the investor. The investor then needs to choose a new security to invest in, which is likely to have a lower rate of return since interest rates overall have dropped since their original investment. Note that there is no prepayment risk with certain types of investments.
Those include noncallable corporate bonds and United States Treasury bonds T-bonds , which do not allow for it. Additionally, collateralized mortgage obligations CMOs and collateralized debt obligations CDOs , issued through investment banks, may be structured in such a way as to lower the risk of prepayment. Further, debt investments associated with a higher-risk tranche often have a longer time to maturity than those with a lower-risk tranche and carry less risk of being paid off early. In addition to the CPR, which expresses prepayment risk in annual terms, investors can look at an investment's single monthly mortality SMM rate.
The SMM is determined by taking the total debt payment that's owed and comparing it against the actual amounts received for a particular month.
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