Extension Risk
The risk of a security lengthening in duration due to the deceleration of prepayments. Investopedia Says:
Extension risk is mainly the result of rising interest rates and is generally associated with mortgage related securities. As interest rates rise, the likelihood of prepayment decreases. Since loans in a pool underlying a security are being prepaid at a slower rate, investors are unable to capitalize on higher interest rates because their investments are locked in at a lower rate for a longer period of time. Related Terms:
Companion Bond
Contraction Risk
Duration
Fannie Mae - Federal National Mortgage Association - FNMA
Interest Rate
Mortgage-Backed Securities - MBS
Pass-Through Security
Planned Amortization Class (PAC) Tranche
Prepayment Risk
Sequential Pay CMO |