interest rate risk

(redirected from Rate Risks)

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 ?
The Bangko Sentral ng Pilipinas (BSP) has issued the guidelines on how banks should handle interest rate risks and its effect on its books and core business such as lending.
Market risks can be divided into equity risks for investments in shares and interest rate risks for investments in money market.
Global Banking News-June 9, 2015--Basel watchdog makes proposal to cover interest rate risks
18 march 2014 - The direction of US interest rates will be a key determinant in the earnings and revenue outlook for trust and processing banks, given the sensitivity these banks have to interest rate risks according to a report from US ratings agency Fitch Ratings.
* As rates rise, interest rate risks will take on new and different dimensions.
Chatham studied the Securities and Exchange Commission (SEC) filings of more than 1,000 public companies with annual revenues between $500 million and $20 billion, excluding financial services and insurance companies, to determine how many of these organizations incur currency, commodity, and interest rate risks, and how they mitigate those risks.
Kurt Karl, Chief Economist of Swiss Re, suggests, "New life insurance products need to be re-priced and their guarantee levels adjusted, but also they should be redesigned so that they can be more easily hedged against interest rate risks. Regulators can facilitate this."
On the other hand, interest rate risks for foreign interest rates will also be measured since most foreign interest rates are hard to move identically.
Summary: Turkey is seeking to switch to payments in national currencies for $10 billion worth of trade with neighboring Iran to lessen exchange rate risks and bolster trade volumes, a Turkish government source said on Friday.AaTurkey has made similar proposals to China and Russia in recent months.AaIran proposed earlier this week during a visit by Turkish Prime Minister Recep Tayyip Erdogan.
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:
In conclusion, I can reject the hypotheses that the stock market perceives Fannie Mae's and Freddie Mac's interest rate risks as perfectly hedged.