interest rate risk

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Interest rate risk

The chance that a security's value will change due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk: The risk that spread income will suffer because of a change in interest rates.

Interest Rate Risk

The risk of loss due to a change in interest rates. Interest rate risk is important to transactions like interest rate swaps. In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease. Interest rate risk is also important to bonds; if interest rates rise, the prices of bonds fall. This affects the secondary market for bonds; for example, if one purchases a bond with a 3% interest rate and the prevailing rate rises to 5%, it becomes difficult or impossible to resell the bond at a profit. Finally, interest rate risk is important to project finance. If interest rates rise, funding may not be available for a new loan for a project that has already started.

interest rate risk

The risk that interest rates will rise and reduce the market value of an investment. Long-term fixed-income securities, such as bonds and preferred stock, subject their owners to the greatest amount of interest rate risk. Short-term securities, such as Treasury bills, are influenced much less by interest rate movements. Common stock prices are also affected by changes in interest rates, although the linkage is less clear than is the case with debt securities and preferred stock.
References in periodicals archive ?
The rating downgrade was prompted by the material increase in long-term funding risks for eurozone sovereigns with high levels of public debt such as Italy and growing downside risks to Italy's economic growth due to a weakening global outlook, the rating agency said.
The ratings agency blamed a "material increase in long-term funding risks for the euro area", due to lost confidence in eurozone government debts.
Moody's cited "the fragile market sentiment" in the euro area that is likely to result in "materially increased financing costs and funding risks.
Funding risks will be limited with incentives to minimize liquidity needs for trading.
Offsetting this is the operational and funding risks assumed by Hutchison in developing its third generation (3G) mobile telecommunications network.
The current volatility in the CMBS market poses funding risks to companies such as CRIIMI MAE that have levered up aggressively using CMBS investments to secure additional borrowings.
Except for historical information contained herein, the matters discussed in this news release are forward-looking statements that involve risks and uncertainties such as scientific and technical challenges involved in state-of-the-art technology development and performance and funding risks which could affect the customer's exercise of optional periods.
Additionally, funding risks are further offset by the maintenance of adequate secondary sources.
Electronic banking can also help banks avoid funding risks, and encourage customer migration from paper to electronic transactions through the use of favorable pricing strategies.

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