May 14, 2020

Prepayment Premiums

Prepayment Premiums

Make-Whole Prepayment Premiums Under Attack
      Chester L. Fisher III, 45(1): 15–33 (Nov. 1989)
Make-whole premiums compensate lenders for the interest they would otherwise receive when a loan is prepaid prior to maturity. The premium is calculated, in part, by assuming that the prepaid loan is reinvested at a specified rate which is frequently the yield on Treasury securities with a maturity comparable to the original maturity of the loan. Two courts have denied the validity of make-whole premiums due, in part, to the courts' view that the assumed reinvestment rate was too low.