CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Select the correct statement(s).

I. Extension risk is the risk that as interest rates rise, prepayments will slow.
II. Contraction risk refers to the decrease in the interest rate sensitivity of mortgage pass-through securities.
Correct Answer: I and II

User Contributed Comments 9

User Comment
danlan2 Is II correct?
ianrh I think 2 is incorrect. Contraction risk is if prepayments increase (from lower interest rates).
jangro I do believe it is correct since cashflows speed up=>duration is shorter=>sensitivity drops...or am I wrong?
valeris Agree, II is right - price of the bond doesn't go up as much due to prepayments.
Lavay Duration is the sensitivity of a bond's price to interest rates. During contraction duration drops, which means the sensitivity of the bond's price as interest rates drops also drops. II is correct.
alki The reason for the duration to drop during contraction is the additional payments that come in which lowers the maturity of the security, lower the maturity, the lower will be its duration....
Luke41 average life approximates duration, so as avg life decreases, so will duration
actiger II is correct.
mazen1967 during contraction duration drops ; it is the sensetivity of the bond prices to intrest rate
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