Interest-rate risk

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.

Interest-rate risk describes the impact that a change in current interest rates is likely to have on the value of your investment portfolio.

You face interest-rate risk when you own long-term bonds or bond mutual funds because their market value will drop if interest rates increase.

That loss of value occurs because investors will be able to buy bonds with a new, higher interest rate, so they won't pay full price for an older bond paying a lower interest rate.

References in periodicals archive ?
The Basel Committee on Banking Supervision is weighing updating its standards for capturing interest-rate risk on assets banks plan to hold to maturity, Stefan Ingves, the regulator's chairman, said in an interview.
That interest-rate risk stool consists of repricing, embedded options, basis and yield curve risks.
By factoring in the timing of both the incoming and outgoing cash flow and pulling down a forward curve, a consultant, San Francisco-based Aperimus, built an interest-rate risk model that calculates income results on existing business.
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.
Moreover, market value reporting provides better information about interest-rate risk management, he said, since it incorporates current interest rates into the measurement of values of all financial assets and liabilities, thereby reflecting the sensitivity of future earnings to movements in interest rates.
While it is a business consideration faced by financial intermediaries, interest-rate risk is ignored in accounting procedures.