Prepayment Option
From Open Risk Manual
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Definition
Prepayment Option is an option granting the holder the right, but not the obligation, to prepay (pay early) principal and/or interest monies at some time before the scheduled payment dates.
Prepayment options are very common option in a variety of loan contracts (e.g. mortgages). They are embedded in said contracts to provide borrowers a desired flexibility but may include variety of possible disincentives or other limitations to prevent the exercise of the option (limiting the amounts possible to prepay without penalties.
