Question: An unanticipated decrease in interest rates exposes investors owning mortgage- backed securities tocontraction risk. Contraction risk is best described as. . . a shorter than

An unanticipated decrease in interest rates exposes investors owning mortgage- backed securities tocontraction risk. Contraction risk is best described as. . .

a shorter than anticipated average life for a mortgage loan as borrowers will choose to pay off their loans sooner than expected.

a greater than anticipated average life for a mortgage loan as borrowers will choose to pay off their loans later than expected.

an increased probability of default, as there is a greater incentive for borrowers to default strategically.

a reduced probability of default, as there is less incentive to default strategically.

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