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Interest Rate Risk
Definition
Interest rate risk is the amount of fluctuation in price that an interest-bearing asset (i.e. a bond or loan) will experience due to the changes in the broad market interest rates. As rates rise, the price of a fixed rate bond will drop, and when rates fall, the price of a fixed bond with increase.
Using the term Interest Rate Risk :
The smiling portfolio manager controls interest rate risk by adjusting the duration of the bond portfolio.
Pay Special Attention To :
Interest rate risk is very important for owners/holders of bonds and should be monitored. A shorter duration portfolio has less interest rate risk than a longer duration portfolio.
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Related terms
Duration
