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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Hong Kong: Fitch Ratings said new rules banning Chinese property companies from using proceeds from offshore bond issuance to invest in new projects appear to formalise a policy that had already been in place since the start of the year, and are unlikely to add significantly to the elevated funding risks that developers are already facing.
Real estate risks, amid bottoming-out property prices and a likely medium-term prospect of recovery fuelled by "renewed domestic and foreign demand," as well as funding risks for banks are expected to remain stable.
According to FIS, People Pay's tight integration with a financial institution's systems eliminates funding risks and exceptions as all transactions are instantly debited directly from the sender's account.
The common methodology of the tests will incorporate a plethora or risk situations that include credit and market risks, exposures toward securitisation, and sovereign and funding risks.
Analysts say funding risks of the banking sector have heightened.
"In addition, funding risks have reduced as a result of actions taken in recent years to lengthen the maturity profile of liabilities and to reduce maturity mismatches," it added.
In addition, "Funding risks have reduced as a result of actions taken in recent years to lengthen the maturity profile of liabilities and to reduce maturity mismatches."
While we view the funds raised as a double-edged sword that can create a false sense of comfort for the government, the removal of short-term funding risks leaves us tactically overweight the Slovenian credit.
The current account deficit and hence funding risks are projected to remain high." This growth pickup would originate mainly from domestic demand.
The threat of the eurozone debt crisis was the most commonly cited risk, with the economic downturn, funding risks and risks around regulation and taxes also in the top five.
The rating downgrade was prompted by the material increase in long-term funding risks for eurozone sovereigns with high levels of public debt such as Italy and growing downside risks to Italy's economic growth due to a weakening global outlook, the rating agency said.

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