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 guidelines aim to provide clear expectations on how a bank/QB should manage IRRBB and align the BSP's supervisory framework on interest rate risk with international standards.
This interpretation of modified duration is incredibly powerful: In one number, an analyst, portfolio manager, banker, agricultural lender, or farmer can measure exactly how much interest rate risk exists on any asset or liability.
In addition to interest rate risk, the report notes, life insurers face geopolitical risks that fuel volatility in financial markets, which affect earnings of the carriers' fee-based businesses and discourage policyholders from purchasing products.
Since the end of the financial crisis, banks have been steadily increasing their exposure to interest rate risk. Aggregate interest rate risk is now almost back to its pre-recession level, and the increase has been widespread, occurring at banks both large and small (Bednar and Elamin 2014).
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.
In Banks' Exposure to Interest Rate Risk and the Transmission of Monetary Policy (NBER Working Paper No.
In its annual report, the FSOC said that the Federal Insurance Office and state insurance regulators "should continue to be vigilant" about interest rate risk. 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.
Senior loans tend to carry very little interest rate risk since they are typically structured as floating rate instruments whose interest payments increase or decrease based on the movement of a reference rate, such as LIBOR.
Consequently, life insurers must re-price their guarantees and also adjust their product offerings to mitigate their exposure to interest rate risk. Non-life insurers need to raise premium rates to compensate for low investment yields.
The primary subject matter of this case is the use of interest rate swaps to lower capital costs and manage interest rate risk. Secondary issues include examining market efficiencies.
Cooper sees insurers focusing on repositioning their investment portfolios to reduce their exposure to interest rate risk while maintaining a reasonable rate of investment income.
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.

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