LIBOR.       Prepayments typically occur due to defaults or loan consolidation. Even if there is no loss of principal faced by the investor when defaults occur, the investor is still exposed to contraction risk. This is the risk that the investor must reinvest the proceeds at a lower spread and in the case of a bond purchased at a premium, the premium will be lost. Stud- ies have shown student loan prepayments are insensitive to the level of interest rates. Consolidations of loans occur when the students who have loans over several years combine them into a single loan. The pro- ceeds from the consolidation are distributed to the original lender and, in turn, distributed to the bondholders.   SBA Loan-Backed Securities The Small Business Administration (SBA) is an agency of the federal government empowered to guarantee loans made by approved SBA lenders to qualified borrowers. The loans are backed by the full faith and credit of the U.S. government. Most SBA loans are variable-rate loans where the reference rate is the prime rate. The rate on the loan is either reset monthly on the first of the month or quarterly on the first of January, April, July, and October. SBA regulations specify the maximum coupon allowable in the secondary market. As of this writing, the maxi- mum coupon rate is equal to the prime rate plus 1.625%. SBA loans typically do not have caps. Newly originated loans have maturities between 5 and 25 years. The Small Business Secondary Market Improvement Act passed in 1984 permitted the pooling of SBA loans. When pooled, the underlying loans must have similar terms and features. The maturities typically used for pooling loans are 7, 10, 15, 20, and 25 years. Loans without caps are not pooled with loans that have caps. Most variable-rate SBA loans make monthly payments consisting of interest and principal repayment. The amount of the monthly payment for an individual loan is determined as follows. Given the coupon for- mula of the prime rate plus the loans quoted margin, the interest rate is determined. Given the interest rate, a level payment amortization sched- ule is determined. It is this level payment that is paid for the months until the coupon rate is reset. When variable-rate SBA loans are pooled, the amortization schedule is based on the net pool rate and the rate is recomputed either every month or every quarter. Prepayments for SBA-backed securities are measured in terms of CPR. Voluntary prepayments can be made by the borrower without any penalty. Exhibit 10.14 presents a Bloomberg screen of the historical