Contraction / extension risk

CFA Level I Glossary

Contraction and extension risk are the two sides of prepayment risk for mortgage pass-throughs and similar assets. Contraction risk is principal returning too fast when rates fall and homeowners refinance, forcing reinvestment at lower yields. Extension risk is principal returning too slowly when rates rise, leaving you stuck with longer duration at unattractive prices. Holders face this two-sided curse; people often remember only the refinance side.

Sign up free — get all 175 CFA Level I terms, flashcards & rank tracking →

More CFA Level I terms

KomFi: Test Prep Made Easy

KomFi: Test Prep Made Easy — free adaptive practice for GMAT, GRE, SAT, ACT, National Real Estate Exam, Investment Banking, and finance with full explanations.

KomFi Academy is free GMAT prep and personalized GMAT help built as a training platform: 77,980+ practice questions, 26,500+ flashcards, on-demand video lectures, podcasts, and 4K slide decks. Flagship tracks: Free GMAT Prep, Free GMAT Resources, National Real Estate Exam Prep, Investment Banking Prep, Finance Prep, GRE, SAT, ACT, LSAT, MCAT, Financial Accounting, Private Equity, Private Credit, and Quantitative Finance.

Free GMAT Prep & Personalized GMAT Help

What's inside

Topics

View pricing · Read testimonials