Funding Risk

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.

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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.