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Funding Risk |
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Funding risk The risk associated with the impact on a project's cash flow from higher funding costs or lack of availability of funds. See: interest rate risk. Funding Risk The risk of loss due to a change in interest rates. Funding risk is important to transactions like interest rate swaps. In such a transaction, the party receiving the floating rate will receive a smaller amount if the floating rate decreases. Funding 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 purchased 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, funding 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. Funding risk is also called interest rate risk. How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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If a project's funding risk changes, it can be compared and contrasted with other programs' sensitivity to change. The advantage of the pre-funding scenario is that it transfers future funding risk to the capital markets at the inception of the transaction but has the disadvantage of reinvestment risk (negative carry) until the funds are fully deployed in the reinsurance trust. There are, of course, several practical obstacles to funding risk reserves or "planning for pain. |
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