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 ?
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.