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 ?
Errors in its use as a measure of interest rate risk increase as actual changes in market yields diverge from these assumptions.
The IRS also contended that since FNMA entered into microhedges to hedge the interest rate risk for specific transactions, and did not enter into a comprehensive program with the business purpose of hedging each element of its interest rate risk, the transactions were not hedges.
Interest rate risk can be reduced or eliminated with the duration strategy.
Currently, with investments making up approximately one-third of credit unions' balance sheets, it is of the utmost importance to ensure that the second biggest asset class does not present an inordinate amount of interest rate risk going forward.
A key element of the Board's efforts to strengthen regulatory and supervisory policies relating to derivatives activities has been the incorporation of measures of credit risks, market risks, and interest rate risks associated with these activities into risk-based capital requirements.
There are two basic risks associated with MBS--credit risk (that the mortgages in the pool will default) and interest rate risk (that interest rates will rise).
Derivatives used for hedging interest rate risk shouldn't be feared.
Once interest rate risk has been incorporated into the risk-weighted ratios, the leverage ratio could be eliminated.
This should eliminate gains from creative packaging of disproportionate sharing of credit risk or interest rate risk on loan sales involving the sale of the right to receive the interest payments, the principal payments or some of either or both.
That said, the Individual rating also reflects LBCB's strong profitability, healthy balance sheet, limited risk profile (LBCB passes most interest rate risk and some credit risk on to Lehman affiliates), and experienced management team.
Approximately 45% of federally insured credit unions would have to develop interest rate risk management policies that include extensive use of risk measurement systems and internal controls, according to a rule approved by the NCUA Board at its Jan.
Interest rate risk remains high, given a substantial percentage of investments held in callable U.

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