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Interest Rate Risk

Interest rate risk is the potential for an investment’s value to decrease due to fluctuations in interest rates. Fixed-income securities, such as bonds, are particularly vulnerable to this risk, as their prices tend to fall when interest rates rise. The risk is primarily faced by investors holding long-term bonds or interest-sensitive securities. Managing interest rate risk is crucial for investors, as changing rates can affect the yield and value of their portfolios.

Example

An investor holding a 10-year bond may see its price drop if the central bank raises interest rates, as newer bonds would offer higher yields, making the older bond less attractive.

Key points

• Refers to the risk of investment value decreasing due to rising interest rates.

• Particularly affects fixed-income securities like bonds.

• Investors holding long-term securities face greater interest rate risk.

Quick Answers to Curious Questions

When interest rates rise, bond prices fall, as newly issued bonds offer higher yields, making existing bonds less attractive.

Investors can manage interest rate risk by diversifying their portfolios, holding bonds with different maturities, or using interest rate hedging strategies.

Interest rate fluctuations directly impact the value of fixed-income securities, affecting the overall return on investment.