extension risk

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Given easy access to capital markets, issuers typically call issues on the first call date, so extension risk is heavily discounted, offering relative value to investors.
The possibility of extension risk has also been factored into the 'S2' Fund Market Risk Sensitivity Rating.
So mortgage securities that are purchased today, if rates were to rise, would exhibit extension risk, and what you thought was a four-year security might wind up being a seven-year security.
"You manage life extension risk by writing better policies.
These partnerships can leverage some of the available grant programs--such as value added producer grants, and the USDA Specialty Crop Block Grants to the states the Sustainable Agriculture Research and Education and Extension Risk Management Education grants program--to enhance the development of these local food marketing outlets for small farmers.
This in turn can prevent refinancing and therefore precipitate the very extension risk they feared.
Developing a functional portfolio that complements your core business entails looking at duration risk, call risk, liquidity risk extension risk just to name a few basic metrics.
At the same time, MARC also sees lingering extension risk with respect to the planned early redemption of KMCOB's 2018 sukuk tranche notwithstanding the new timeline of December 31, 2013 for the completion of the West African asset disposals.
Among the risks that regulators cited during the discussion are: extension risk in which the security might not mature at the time it was expected to mature, and that the security would be more volatile than was incorporated in any of its available ratings.
Other risks to consider are reinvestment risk and extension risk. Reinvestment risk is the risk that, in a falling interest rate environment, an investor will receive principal and interest payments earlier than expected and be forced to reinvest at a lower interest rate.