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.

Interest-rate risk describes the impact that a change in current interest rates is likely to have on the value of your investment portfolio.

You face interest-rate risk when you own long-term bonds or bond mutual funds because their market value will drop if interest rates increase.

That loss of value occurs because investors will be able to buy bonds with a new, higher interest rate, so they won't pay full price for an older bond paying a lower interest rate.

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References in periodicals archive

Wihlborgs Fastigheter AB (Wihlborgs)(STO:WIHL), a property company that focuses on commercial properties in the Oresund region, announced on Thursday the restructuring of its portfolio of interest-rate derivatives following a review of the company's management of interest-rate risk.

Wihlborgs Fastigheter reviews interest rate risk; restructures interest-rate derivative portfolio

The negative impact of rising interest rates for Omani banks is at odds with the Basel interest-rate risk disclosures in their financial statements, which imply that a 200bp parallel upwards shift in the yield curve would benefit margins.

Fitch Ratings: Omani Banks' Margins Fall on Rising Rates; Unique in GCC

The Basel Committee on Banking Supervision is weighing updating its standards for capturing interest-rate risk on assets banks plan to hold to maturity, Stefan Ingves, the regulator's chairman, said in an interview.

Banks face global push to prepare for higher interest rates

Loans held in portfolio need to be backed by capital to address three risks: normal credit risk, interest-rate risk, and catastrophic risk.

Appendix 2: Nonprime loans

A mortgage originator could either commit to selling a mortgage to Freddie Mac at a specific price and pay a small application fee, or obtain pre-approval for a later purchase of a mortgage at a variable price (along with a degree of interest-rate risk protection) and pay a larger "commitment fee."

Loan purchase commitment fees upheld as option premiums

"We're telling investors not to invest in long-term corporate and Treasury bonds because that's where the interest-rate risk is the greatest."

Year-end investment strategies: the end of the year could be the beginning of great portfolio returns

"We have not taken a great deal of interest-rate risk because rates have been so low and I think we're very well-positioned to grow our bottom line in the future, and that bodes well for our stock."

The survivor: Jim Rohr has beaten challenges, and odds, at PNC

We find that bank analysts' risk and value judgments distinguish banks' exposure to interest-rate risk only under full-fair-value-income measurement.

Fair values, income measurement, and bank analysts' risk and valuation judgments