Question: What do you mean by call risk in case of MBS (mortgage-backed-security)?
Answer: For mortgage-backed securities, the cash-flow depends on prepayments of principal made by the homeowners in the pool of mortgages that is the collateral for the security. And in this case Call risk called prepayment risk.
Question: What do you mean by contraction risk in case of MBS?
Answer: The risk that homeowners (who took the loan) can prepay all or part of their mortgage when interest rates decline or their earning increases. That is called contraction risk.
Question: What do you mean by extension risk in case of MBS?
Answer: It is also possible that prepayments will slow down when mortgage interest rates rise and as an investor you want that the pool of mortgages would prepay at a faster rate, and you can re-invest this prepaid money somewhere else to get more return/yield, that is called extension risk.
Question: What is the credit risk on the bonds?
Answer: Following two are the credit risk on the bonds. - The risk that the issuer will default on its obligation i.e. default risk. - The risk that the bond’s value will decline and/or the bond’s price performance will be worse than that of other bonds against which the investor is compared.