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.

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

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.
References in periodicals archive ?
According to Moody's Investor Services, Irish life insurance firms are least exposed to interest rate risks.
The likely costs of the interest rate risks embedded in the F&F retained mortgage portfolio are further magnified by two effects unique to F&F as government-sponsored enterprises:
Moreover, many observers are skeptical that the GSEs can be as profitable as they claim if they are fully hedging their interest rate risks.
S&P) said Thursday it is concerned that interest rate risks assumed by Japanese banks, especially the major banks, are high relative to their capital bases.
In fact, most of these institutions appear to use derivatives solely or at least primarily for hedging, that is, to reduce the interest rate risks and other market risks associated with their traditional portfolios of loans, securities, and deposits.
The member's decision to convert to the long-term variable interest rate or to remain with the variable-rate program, will ultimately depend upon the corresponding interest rate risks the member is willing to assume in order to achieve the savings associated with the lower variable interest rate option.
For institutions that undertake interest rate risks outside of established parameters, more detailed reporting would be required and could be the basis for a more precise calculation of an additional capital requirement.

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