The risk associated with the impact on a project's cash flow from higher funding costs or lack of availability of funds. See: interest rate risk.
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