medium · FRM Part 1 Foundations of Risk Management
In the context of mortgage-backed securities (MBS), what is 'Extension Risk'?
- The risk that borrowers refinance their loans faster when interest rates fall.
- The risk that the credit quality of the underlying mortgages deteriorates over time.
- The risk that the servicer fails to pass through the mortgage payments to investors.
- The risk that prepayments slow down when interest rates rise, lengthening the duration of the MBS.
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