Contraction Risk

What Does Contraction Risk Mean?
The risk of a security shortening in duration due to the acceleration of prepayments.

Investopedia explains Contraction Risk
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.

Related Terms

Companion Bond
Duration
Extension Risk
Fannie Mae - Federal National Mortgage Association - FNMA
Mortgage Backed Securities - MBS
Pass-Through Security
Planned Amortization Class (PAC) Tranche
Prepayment Risk
Sequential Pay CMO
Vintage
More Related Terms

Related Links

Advanced Bond Concepts - Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
Compare Local Interest Rates - Search and compare the best checking and savings rates nationwide from Bankrate.com. Click Here!

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