What is meant by the prospectus prepayment curve?
What will be an ideal response?
First, we note that repayments are measured in terms of the conditional prepayment rate (CPR). Borrower characteristics and the seasoning process must be kept in mind when trying to assess prepayments for a particular deal.In the prospectus of an offering, a base-case prepayment assumption is made—the initial speed and the amount of time until the collateral is expected to be seasoned. A unique prepayment benchmark can be developed for an issuer. This benchmark speed in the prospectus is called the prospectus prepayment curve (PPC). Slower or faster prepayment speeds are a multiple of the PPC. In essence, the PPC refers to a multiple of the base case prepayments assumed in the prospectus.
The HEP (home equity prepayment) curve is a prepayment scale (ranging from 0% to 100%) for HELs that captures the more rapid plateau for home-equity prepayments vis-a-vis that of traditional mortgages. It is a 10-month seasoning ramp with even step-ups, terminating at the final HEP percentage in the 10th month. The standard HEP is 20%; it equals 2% CPR in the first month, 4% in the second month, 6% in the third month and so on until it levels off at 20% CPR in the 10th month.
Sometimes called the pricing prepayment curve, the PPC is a relatively new convention, used mainly with home-equity loans (HELs). It refers to the pricing speed of a transaction as defined in the prospectus and is always issue-specific. Issues are normally priced at 100% PPC, but comparisons among deals can be difficult because PPC may be defined differently in each security's prospectus.
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