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Definition of 'Interest Rate Risk'
The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).
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Investopedia explains 'Interest Rate Risk'
Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates.
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By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
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Learn which tools you need to manage the risk that comes with changing rates.
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Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation.
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Get a deeper understanding of the importance of interest rates and what makes them change.
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Understanding interest rates helps you answer the fundamental question of where to put your money.
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Get to know the basic, time-tested strategies that any investor or trader can use to profit in a rising interest rate environment.
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Don't assume that you can't lose money in this market - you can. Find out how.
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