Long-Term Rate Risk

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Long-Term Rate Risk

The risk of loss due to a change in interest rates on a long-term bond. 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. Because long-term bonds have a maturity of several years, there is a greater possibility that interest rates will move in an adverse direction. Long-term rate risk is part of the reason that rates on long-term bonds are (usually) higher than those on short-term bonds. See also: Yield curve.

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