Prepayment risk is the risk that a bond will be called.

Question

Quizplus · Accepted Answer

Prepayment risk refers to the possibility that a bond will be called by the issuer before its maturity date, triggering early repayment of the principal amount to bondholders. This exposes investors to reinvestment risk, where they may not be able to secure the same level of returns on new investments as on the called bond. Therefore, prepayment risk is a real threat for investors in callable bonds.

Prepayment Risk Is the Risk That a Bond Will Be