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.