Rate Risk

Rate risk

In banking, the risk that profits may drop or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

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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.