Zero Prepayment Assumption

The supposition that scheduled principal and interest will be paid off with no installments. This is typically done as a means of providing a benchmark to gauge other, more complex assumptions. By determining what a product or service will cost without financing, individuals or companies can better budget their resources and plan for future expenditures and/or revenue growth.

Prepayment assumptions are critical in valuing mortgage-backed securities with various models making assumptions about prepayment patterns under various interest rate changes. Thus, having an established standard can be helpful in determining the fair value of such investments.