Yield maintenance
Asset-Backed Securities glossary · Asset Specific Nuances
Definition
A prepayment penalty structure compensating the lender for lost interest on early prepayment.
Yield maintenance in plain English
Yield maintenance is a 'don't leave me hanging' penalty a borrower pays for paying off a loan early. When you pay a lender back ahead of schedule, they lose all the future interest they were counting on — and now they have to re-lend the money, probably at today's lower rates. Yield maintenance makes them whole: the borrower pays a lump sum that roughly replaces that lost interest, so the lender ends up with the same yield as if the loan had run its full term. It's like breaking a phone contract early and being charged for the remaining months so the company isn't shortchanged.
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