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Contraction Risk |
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Contraction Risk The risk of a security shortening in duration due to the acceleration of prepayments. Notes: This risk is mainly due to lowering interest rates. Contraction risk is generally associated with mortgage securities. As interest rates decrease, the likelihood of prepayment increases. How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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| 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. |
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Contraction Risk
