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 ?
The regulations are of significant importance to a wide range of taxpayers using bedging techniques for business purposes, e.g., mortgage bankers hedging interest-rate risks; dealers in physical commodities (grain, oil, coffee, metals, etc.) hedging their commodity price risks; and any number of industries that hedge their price risks for raw materials (including supply hedges).
For example, if a series of futures contracts or options is used to hedge an interest-rate risk from a taxpayer's issuance of fixed interest-rate debt, any gain or loss on the hedging transactions should be accounted for using a constant yield method over the instrument's life.