when a borrower obtains financing either by issuing bonds or by taking out a loan e g mortgage auto loan business loan etc the lender is periodically paid interest as compensation for the use of their money for a period of time the interest that is expected constitutes a rate of return for the lender who projects earnings based on the rate 
for example an investor who purchases a 10 year bond with a 100 000 face value and an annual coupon rate of 7 intends to be credited annually by 7 x 100 000 7 000 likewise a bank that approves a 350 000 at a fixed interest rate expects to receive interest payments monthly until the borrower completes the mortgage payments years down the line however there are situations in which the borrower pays off the loan early or calls in a bond prior to the maturity date this threat of a premature return of the principal is known as prepayment risk in financial lingo prepayment means the settlement of a debt or installment loan before its official due date every debt instrument carries it and every lender faces it to some degree the risk is that the lender won t get the interest income stream for as long a period as they counted on the most common reason for loan prepayment is a drop in interest rates which provides an opportunity for a borrower or bond issuer to refinance its debt at a lower interest rate to compensate lenders in the event that a borrower repays the loan earlier than scheduled a prepayment fee or premium known as yield maintenance is charged in effect the yield maintenance allows the lender to earn its original yield without suffering any loss yield maintenance is most common in the commercial mortgage industry for example let s imagine a building owner who s taken out a loan to buy an adjacent property it s a 30 year mortgage but five years in interest rates have fallen considerably and the owner decides to refinance he borrows money from another lender and pays off his old mortgage if the bank that issued that mortgage imposed a yield maintenance fee or premium it would be able to reinvest the money returned to them plus the penalty amount in safe treasury securities and receive the same cash flow as they would if they had received all scheduled loan payments for the entire duration of the loan 