How is Curtailment different from Prepayment for Fixed Income securities? Why would there be a situation for Curtailment?
Yeah, this is confusing. When the loan is paid back completely, it is prepayment. When it is paid back partly, you can call it either prepayment or curtailment.
http://www3.interscience.wiley.com/journal/120783962/abstract?CRETRY=1&SRETRY=0 This is what I found over internet. --------------------------------------------------------- Elective Mortgage Prepayment: Termination and Curtailment Peter Chinloy* *American University, Washington, D.C. 20016 Copyright American Real Estate and Urban Economics Association ABSTRACT --------------------------------------------------------- Mortgage-prepayment risk underlies the structuring of mortgage-backed derivative securities, such as tranched real estate mortgage investment conduits. This prepayment comes either from mortgage termination or from curtailment, where the borrower retains the existing mortgage and prepays a portion. There are differences in cash flows from the two types of prepayment. In termination, the loan disappears from a pool, and the scheduled payment to investors in the pool is reduced. In curtailment, the loan survives, and the scheduled payment is unchanged but the term is reduced. There are implications for structuring mortgages and derivative securities. The prepayment decision is embedded in an in-tertemporal household utility maximization framework where choices are made between refinancing, making the regular payment, default or curtailment. Empirical results are presented for Government National Mortgage Association (GNMA) pools, and an algorithm is presented that separates the termination and curtailment components, facilitating the development of derivative securities.