Contraction Risk

Contraction Risk

The risk that the duration of a debt security will decline because of prepayment. Duration is the length of time it takes to receive the present value of future principal and interest payments on a debt security; prepayment will deprive the holder of a bond of future coupons, resulting in less interest and therefore a shorter duration. Contraction risk is most prominent in mortgage-backed securities. See also: Prepayment risk.
References in periodicals archive ?
There is no doubt that influenza and ILI (influenza-like illness) contraction risk is much greater outside of the healthcare setting than within it.
Within the adjustable rate securities market, the bias has shifted from monitoring contraction risk to monitoring extension risk, as prepayments have come way down from their June highs.