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 ?
These types of bonds are traded based on credit quality and interest-rate exposure.
Companies that want to reduce their interest-rate exposure over the longer haul may want to borrow sooner, locking in rates that are still low now against the averages.
In testimony to a senate banking committee hearing on the state of the banking industry, he said: 'In general, the industry is adequately managing interest-rate exposure.
The cap expired in December of 1991, but Quanex is now using other options to control its interest-rate exposure.
Futures on the DTCC's GCF Repo Index are designed to help traders better manage their interest-rate exposure by tracking the multi-billion dollar General Collateral Finance (GCF) Repo([R]) market.
Our credit risk and financial management teams have made great strides over the past 18 months strengthening asset quality, reducing the interest-rate exposure in our balance sheet and improving net interest margin.
The office of Thrift Supervision (OTS) is now experimenting with an internally developed market value model that uses data provided by thrift institutions to measure their interest-rate exposure.
The leadership team evaluates both broad economic factors and security-specific issues, which assists money managers to determine the portfolios' overall interest-rate exposure and which fixed-income areas to emphasize.