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 audit was conducted by interviewing NCUA staff, reviewing NCUA guidance, policies, procedures and other interest rate risk information.
The guidance provided in these updated guidelines applies to the interest rate risk arising from non-trading activities (IRRBB), one of the Pillar 2 risks specified in the Capital Requirements Directive (CRDIV).
It found that life insurers in Germany, Netherlands, Norway and Taiwan are amongst the most exposed to interest rate risks, while companies in Australia, Brazil, Ireland, Mexico and the UK are the least exposed.
Interest rate risk has risen well past pre-recession levels at small banks, and the increased exposure comes from a dramatic increase in the maturities of their assets, both loans and securities.
Require complete hedging of all F&F interest rate risk, using matching callable bonds.
Its aircraft leases generally extend for up to thirty years, so for this portfolio, Krakowski, the chief financial officer, waited to assess interest rate risk on the loans until the portfolio grew to critical mass.
It is becoming increasingly important for banks to monitor and limit their interest rate risks, as current capital levels are too weak to absorb additional shocks,'' the U.
It claimed it was hedging interest rate risk for its commercial paper.
Kevin Stoklosa, a FASB project manager, explained the reasoning behind the amendment provisions related to hedges of interest rate risk and hedges of foreign-currency-denominated assets and liabilities.
Combined with conventional Treasury bonds, they allow investors to separate inflation risk from real interest rate risk and thus manage risk more efficiently.
In an intriguing article appearing in this journal, Staking and Babbel (1995) empirically examine the relationship between interest rate risk and market value for firms operating in the insurance industry.
On the whole, these changes, when considered in the context of the growing competition in financial services have led to the perception among some industry observers that interest rate risk in commercial banking has significantly increased.

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