extension risk

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Extension Risk

The risk of a loss to an investor in a mortgage-backed security that comes from a lower prepayment rate. The mortgages underlying a mortgage-backed security may be prepaid, which will return the principal amount to the investor sooner. However, this is unlikely to occur when interest rates are rising because mortgage payers have no incentive to refinance to lock in a lower interest rate. This extends the amount of time that the investor has his/her funds in the mortgage-backed security; this could deprive him/her of investing in another security with a higher interest rate. See also: Opportunity cost, interest rate risk.

extension risk

The possibility that rising interest rates will slow the rate at which loans in a pool will be repaid, thereby slowing the return of principal to investors who have committed funds to the pool. For example, rising interest rates will reduce the rate at which holders of mortgage-backed securities have their principal returned.
References in periodicals archive ?
Commercial mortgage-backed securities ("CMBS") are subject to credit, interest rate, prepayment and extension risks.
Officials accept that any extension risks jeopardising slurry storage capacities.
And further extension risks dividing the communities the Prime Minister pledged to unite.
An extension risks sending confusing signals to the duty-free industry.
Enhancements to the criteria include: --Incorporating Fitch's latest basis stresses in cash flow analysis; --Highlighting the servicer risk in light of developments in the FFELP landscape; --Detailing performance base case assumptions and adjustments to stresses applied to performance variables; --Refining maturity stress to cash flow scenarios to address liquidity and extension risks.
Asset-backed, mortgage- backed or mortgage-related securities are subject to prepayment and extension risks.
Investing in asset-backed, mortgage-backed or mortgage-related securities subjects the Fund to additional risks such as prepayment and extension risks.
Asset-backed, mortgage-backed or mortgage related securities are subject to additional risks such as prepayment and extension risks.
Collateralized debt obligations are generally subject to credit, interest rate, valuation, prepayment, derivatives, short sales and extension risks.
To the extent that the Fund invests in Mortgage-Related Securities , its exposure to prepayment and extension risks may be greater than investments in other fixed-income securities.
Commercial mortgage-backed securities (MBS are subject to credit, interest rate, prepayment and extension risks.
The company has rebalanced its bond portfolio so that prepayment and extension risks are reduced from prior years' levels.