interest rate risk

(redirected from Interest-Rate Exposure)

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 ?
In view of this, managing interest-rate exposure is imperative.
"You can get far more interest-rate exposure to hedge your liabilities with an LDI strategy, and a more efficient return-seeking portfolio by allocating to global credit, high yield, emerging market debt, mortgage bonds, and active absolute-return bond strategies."
Banks that have an income gap could use interest-rate derivatives to hedge against the risks of a rate hike by the Fed, but they appear not to fully hedge their interest-rate exposure, according to this study.
In a traditional defined benefit plan with a typical allocation such as 60% equities and 40% fixed income, Armant says, about half the risk comes from interest-rate exposure and the other half comes from capital-market exposure.
Too many--the majority, really--are not measuring interest-rate exposure. And so many servicers have no system for calculating the economic value of their servicing assets.
Companies that want to reduce their interest-rate exposure over the longer haul may want to borrow sooner, locking in rates that are still low now against the averages.
Banks frequently employ interest-rate swaps to hedge the interest-rate exposure associated with their variable-rate DDLs.
In testimony to a senate banking committee hearing on the state of the banking industry, he said: 'In general, the industry is adequately managing interest-rate exposure.' He added: 'The industry appears to have been sufficiently mindful of interest rate cycles and not to have exposed itself to undue risk.'
These findings suggest that analysts recognized the difference in interest-rate exposure across the hedged and exposed bank and did not expect it to change in the near future.
DB plan, which at the time was 106% funded and, as a result, we decided with our senior management that an immunization strategy was the right strategy going forward even with pension expense considerations; so, in November 2007, we decided to move out of public equities and into fixed-income and hedged out interest-rate exposure 100%.
The cap expired in December of 1991, but Quanex is now using other options to control its interest-rate exposure. Explains Hellner, "In July of 1991, our company had committed large amounts of fixed-rate debt, so we put a floor agreement in place for a portion of the outstanding debt.
* The office of Thrift Supervision (OTS) is now experimenting with an internally developed market value model that uses data provided by thrift institutions to measure their interest-rate exposure.