A security is considered "defeased" when all of the payments on the security have been made and the security is no longer outstanding. This typically happens when the security matures and is paid off in full.
What are defeasance costs? Defeasance costs are the costs associated with prepaying a bond. In order to prepay a bond, the bondholder must first find a replacement investment that has the same or better yield. The bondholder then pays the difference between the price of the bond and the price of the replacement investment to the issuer of the bond. The issuer uses this money to pay off the bond.
What does Defease mean? Defease is a term used in the fixed income market to describe the process of removing the risk of interest rate fluctuations from a bond. This is typically done by entering into a swap agreement with another party, where one party agrees to pay a fixed rate of interest in exchange for receiving a variable rate of interest.
How does a defeasance work? A defeasance allows a borrower to swap out their current bond obligations for a new set of bonds with different terms. The new bonds are typically used to pay off the old bonds, and the borrower is released from their obligations under the old bonds. Defeasances can be used to change the interest rate on the bonds, the maturity date, or both.
What does defeased mean in CMBS?
"Defeased" refers to a security that is no longer paying interest or principal. In the context of CMBS, a defeased security is one that has been removed from the pool of collateral backing the bonds. This typically happens when the property pledged as collateral is sold, and the proceeds are used to pay off the outstanding balance on the security. How is prepayment penalty taxed? Prepayment penalties are typically assessed by lenders when borrowers repay their loans early. The IRS treats these penalties as interest income, which is taxed at the borrower's marginal tax rate.