Default risk versus prepayment risk on loans

How does default risk differ from prepayment risk for a lender or bond investor?

Default risk is the borrower failing to pay; prepayment risk is the borrower paying back early. Default causes a loss of principal and interest (offset only by recovery), and is worst when the borrower's credit deteriorates. Prepayment returns principal sooner than expected, typically when rates have fallen and refinancing is attractive, so the investor must reinvest at lower yields; this gives mortgage-backed securities negative convexity even when they carry no credit risk (e.g. agency MBS).