Extension Risk
What Does Extension Risk Mean?
The risk of a security lengthening in duration due to the deceleration of prepayments.
Investopedia explains Extension Risk
Extension risk is mainly the result of rising interest rates and is generally associated with mortgage related securities. As interest rates rise, the likelihood of prepayment decreases. Since loans in a pool underlying a security are being prepaid at a slower rate, investors are unable to capitalize on higher interest rates because their investments are locked in at a lower rate for a longer period of time.
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