Income Risk

What Does Income Risk Mean?
The risk that the income stream paid by a fund will decrease in response to a drop in interest rates. This risk is most prevalent in money market and other short-term income fund strategies, rather than longer term strategies that lock in interest rates. This is an extension of the interest rate risk on an individual bond.

Investopedia explains Income Risk
The following example demonstrates the income risk in a short-term, fixed-income fund. If interest rates are 5%, the money market fund will pay out 4.75%. However, if interest rates suddenly drop to 2%, the fund's payout will have to drop to around 1.75% because it will be reinvesting its funds at the new rate.

Related Terms

Money Market
Rate Level Risk
Reinvestment Risk
Short-Term Investment Fund - STIF
Treasury Bill - T-Bill
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