Interest Rate Sensitivity

DEFINITION of 'Interest Rate Sensitivity'

A measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. Securities that are more sensitive will have greater price fluctuations than those with less sensitivity. This type of sensitivity must be taken into account when selecting a bond or other fixed-income instrument that the investor may sell in the secondary market.

BREAKING DOWN 'Interest Rate Sensitivity'

Generally, the longer the maturity of the asset, the more sensitive the asset will be to changes in interest rates. Changes in interest rates are watched closely by bond and fixed income traders, as the resulting price fluctuations will affect the overall yield of the securities. Investors who understand the concept of duration can immunize their fixed-income portfolios to changes in short-term interest rates.

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