The risk that arises from premature repayment (by a borrower to a lender) of the “outstanding” amount of a loan (i.e., the principal amount or a portion of it) outstanding on a loan. This includes any debt instruments such as bonds, notes, bills, etc, and any forms of structured lending (e.g., mortgages and similar arrangements). This risk reflects the loss of the interest payments that would otherwise have become due on a loan or a debt security due to early repayment.

The lender (investor) may be forced to re-invest at lower rates (depending on prevailing rates in the market).