Contraction Risk
The risk of a security shortening in duration due to the acceleration of prepayments.
Investopedia Commentary
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 Links
Advanced Bond Concepts
See also: Duration, Extension Risk, Fannie Mae, Interest Rate, Mortgage Backed Security, Pass Through Security, Prepayment Risk