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 loans faster once interest rates decline meaningfully.
- The risk that credit quality of the underlying mortgage pool deteriorates gradually over time.
- The risk that the loan servicer fails to remit scheduled mortgage payments through to investors on time.
- The risk that prepayments slow down when interest rates rise, lengthening the duration of the MBS.
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