Home / Offering Memorandum / RISK FACTORS AND INVESTMENT CONSIDERATIONS / Prepayment Risk

18.58. Prepayment Risk

During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, forcing the Investment Compartment to reinvest in lower yielding securities, resulting in a possible decline in the Investment Compartment’s income and distributions to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“call protection”). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Investment Compartment, prepayment risk may be enhanced.