Define Prepayment Risk and Liquidity Risk.

Prepyment risk : The risk associated with the early unscheduled return of principal on a fixed-income security. Some fixed-income securities, such as mortgage-backed securities, have embedded call options which may be exercised by the issuer, or in the case of a mortgage-backed security, the borrower. The yield-to-maturity of such securities cannot be known for certain at the time of purchase since the cash flows are not known. When principal is returned early, future interest payments will not be paid on that part of the principal. If the bond was purchased at a premium (a price greater than100) the bond's yield will be less than what was estimated at the time of purchase. 

 

Liquidity Risk : - Probability of loss arising from a situation where (1) there will not be enough cash and/or cash equivalents to meet the needs of depositors and borrowers, (2) sale of illiquid assets will yield less than their fair value, or (3) illiquid assets will not be sold at the desired time due to lack of buyers.

Liquidity risk: the risk borne by the investor when investing in an investment tool can not sell them in a timely manner and as quickly as desired. As for the risk of prepayment is you do not have to return for payment and there are no guarantees you return the amount paid and the payment so that it becomes a bad debt lead to the loss of the amount paid

1. prepayment risk: associated with a fall in interest rates that is incurred by the lender or investor. As interest rates fall, most borrowers will pay of their loan balances and the investors are left to reinvest them at rates lower than they would have preferred.
2. liquidity risk: is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Types of liquidity risk[edit] Market liquidity – An asset cannot be sold due to lack of liquidity in the market – essentially a sub-set of market risk.

 

 

Prepayment Risk is financial risk which is likely to be caused due to weak investment strategy,adverse business factor and default made by concerned parties thereby. Prepayment risk increases the liquidity risk and adversly affects the liquidity position. Whereas liquidity risk is financial risk which is caused due to poor financial planning and adverse market factors and which adversely affects the cash position of the business. If prepayment is made asper favourable business factors and strong business strategies, good business trades can be achieved and financial risk can be avoided.

Prepayment risk is the risk of borrowers paying more than their required monthly payments, thereby reducing the interest of the loan.

 

Liquidity risk- The risk that arises from the difficulty of selling an asset in a timely manner. It can be thought of as the difference between the "true value" of the asset and the likely price, less commission.

 

 

 

prepayment risk which reduce  interest income  

the  risk that  debitor will  avoid interest charges by making partial or  total payment  in advance on a mortagage or loan ,specially when interest rate fall 

liquidity risk : is  the risk when company or banks may be un able  to  meet short term financial  demand  the  usually occurs due to inability  to convert a security or  hard assets  to  cash  with  out  lose  

 

I agree with the gentlemen and gentle ladies concerning their answers.

Prepayment risk is he risk associated with the early unscheduled return of principal on a fixed-income security. Some fixed-income securities, such as mortgage-backed securities, have embedded call options which may be exercised by the issuer, or in the case of a mortgage-backed security, the borrower.

Liquitdity risk means lack of cash resources to pay off all the liabilities.

Aalsjulh risk arises from the inability of the bank to meet the shortfall in funding commitments or increase in 

When the assets are not sufficient liquidity bank is unable to obtain sufficient funds, either through increased 

Obligations or carry a reasonable cost to transfer its assets quickly to liquid assets, which affect the profitability and, in cases 

The maximum possible result of insufficient liquidity to the lack of solvency of the bank. 

To manage this risk require the following: 

• the application of management information systems and financial developments reflect liquidity conditions. 

Analysis of funding needs and benefits obligations and planning for emergencies. 

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• good management of assets and liabilities, including arrangements that fall outside the budget. 

• Maintaining an adequate level of liquid assets. 

• The existence of diverse funding base in terms of the sources of funds and maturities. 

The financial indicators and ratios of the most important tools of financial analysis upon which management in the process of analyzing menus 

Finance, including the detection of cash flow. It has increased its importance after radical transformations in the business world and the increasing role of the worst s 

Money and diversity of financial instruments as well as the need for institutions and dealers with information and financial indicators to guide 

In making their decisions.

Prepayment: Just  lika a down payments .. non refundable (or refunded after certain deduction).Liquidity: in case of risk definition ..  Liquidity risk directly proposrtional to Market liquidity.. In Pakistan if you want to sale out Suzuki Mehran car that's running cash (easy availability of buyers and Spare parts) but its difficult to find out buyers of Parado ... That's what i think definition in easy way 

Prepayment Risk is When interest fall  Mortgagor or debtor payoff his obligation with refinance on current ( Low )rate.

For Example : Home owner pay all his mortgage loan and refinance it with low interest rate.

Liquidity Risk is when bank or company is unable to fulfill their short term financial need.

This usually occurs due to the inability to convert a security or hard asset to cash without a loss of Capital or income in the process

For example. A company want to sell its Plant to meet the finacial requirement but they sell it low than actual value because of inavailabilty of potential buyers.