Final answer:
CPY prepayment speed, or Conditional Prepayment Rate, is an annualized rate showing the expected proportion of a pool of loans to be prepaid in a year, affecting investor returns on mortgage-backed or asset-backed securities.
Step-by-step explanation:
The CPY prepayment speed refers to the Conditional Prepayment Rate (CPR), which is a measure used to estimate the annualized rate of prepayment for a mortgage-backed security (MBS) or an asset-backed security (ABS). The CPR represents the proportion of the principal of a pool of loans that is expected to be paid off prematurely in a given year. Modeling prepayment speeds is crucial for investors in these securities as it affects their returns. A higher prepayment speed can lead to lower returns for holders of MBS or ABS, as payments are received earlier than expected, thereby shortening the duration and potentially reducing the amount of interest collected over the life of the loans.