Rate risk


Also found in: Wikipedia.

Rate risk

In banking, the risk that profits may drop or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

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.
References in periodicals archive ?
The Office of Inspector General recommended adding an S category to the NCUA's CAMEL rating system to more effectively monitor interest rate risk, according to a Nov.
Types of interest rate risk in the banking book include banks getting a relatively low interest rate on investments such as mortgages, while being under competitive pressure to offer higher rates to depositors.
Global Banking News-March 27, 2015--Moody's says Irish life insurance firms 'least exposed' to interest rate risk
Interest rate risk management is retaking center stage in the minds of financial services professionals as U.
Managing the interest rate risk inherent in this mismatch is critical to bank survival.
The report identified interest rate risk at nsurance companies as "one of a handful of serious vulnerabilities" about which the FSOC must maintain close scrutiny.
New Fund Can Help Investors Manage Interest Rate Risk and Pursue Higher Yields
The nation's banks, thrifts, and credit unions must be particularly mindful of interest rate risk, Federal Reserve System Vice Chairman Donald Kohn said in a January 29 speech on interest rate risk management at a symposium sponsored by the Federal Deposit Insurance Corporation.
They are as follows: (a) a well-developed foreign exchange market; (b) a nominal anchor for monetary policy to replace the fixed exchange rate; (c) policy for central bank intervention in the foreign exchange market, that is the practice of buying or selling the local currency to influence its exchange rate; and (d) an exchange rate risk management mechanism for monitoring and managing both public and private sectors exposure.
Second, key government officials, including Alan Greenspan, Douglas Holtz-Eakin, and John Snow, have recognized that F&F interest rate risk creates significant systemic risks for the U.
At one firm, for example, the interest rate risk exposure of every fixed-income security was translated into the corresponding quantities of two-year, 10-year and 30-year treasuries that, if sold, would offset that exposure.
Exchange rate risk may come into play when assessing market opportunity; but it does not appear to be, in and of itself, a deterrent to investment, except in the case of outright currency crises.