Posted in Finance, Accounting and Economics Terms, Total Reads: 938
Definition: Interest Rate Risk
Interest Rate Risk can be defined as the variability on the value of a financial instrument due to changing interest rates. The common measure used for interest rate risk is the duration of the instrument. For a higher duration, the risk is said to be on the higher side.
In case of bonds, with an increase in the interest rates, the bond value will decrease and vice-versa. This is due to the interest rate risk. Diversifying the fixed income investment durations can decrease this risk. For example, in case of increased interest rates, the interest rate risk can be reduced by easily extending the time periods of the fixed rate instruments.