Interest rate risk,
Definition of Interest rate risk:
Interest rate risk is the potential for investment losses that result from a change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment will decline. The change in a bond's price given a change in interest rates is known as its duration.
Probability that the market interest rates will rise significantly higher than the interest rate earned on investments such as bonds, resulting in their lower market value. This risk is higher on long-term bonds.
Interest rate risk can be reduced by holding bonds of different durations, and investors may also allay interest rate risk by hedging fixed-income investments with interest rate swaps, options, or other interest rate derivatives.
How to use Interest rate risk in a sentence?
- Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment:.
- Interest rate risk can be reduced through diversification of bond maturities or hedged using interest rate derivatives.
- Interest rate risk is measured by a fixed income security's duration, with longer-term bonds having a greater price sensitivity to rate changes.
- As interest rates rise bond prices fall, and vice versa. This means that the market price of existing bonds drops to offset the more attractive rates of new bond issues.
Meaning of Interest rate risk & Interest rate risk Definition