What is the 'Interest Rate Risk'
The interest rate risk is 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 fixedincome securities with different durations) or hedging (e.g. through an interest rate swap).
BREAKING DOWN '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.

Duration
A measure of the sensitivity of the price (the value of principal) ... 
Yield Curve Risk
The risk of experiencing an adverse shift in market interest ... 
Variable Interest Rate
An interest rate on a loan or security that fluctuates over time, ... 
Dollar Duration
Dollar duration measures the dollar change in a bond's value ... 
Term Structure Of Interest Rates
The relationship between interest rates or bond yields and different ... 
Floating Interest Rate
An interest rate that is allowed to move up and down with the ...

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What is affected by the interest rate risk?
Find out more about interest rate risk, how bond prices are affected by interest rate fluctuations and how interest rate ... Read Answer >> 
What types of investors are susceptible to interest rate risk?
Learn how bondholders are more susceptible to interest rate risk than equity investors because of the direct correlation ... Read Answer >> 
How can an investor reduce interest rate risk?
Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >> 
What are the biggest risks of fixedincome investing?
Learn about the three biggest risks of bonds and other fixedincome investments. Find out more about related issues and learn ... Read Answer >> 
How does the Fisher effect illustrate returns on bonds?
Learn how the Fisher effect shows the impact of expected future increases in inflation on the prices of bonds and their interest ... Read Answer >> 
What are the risks of investing in a bond?
The most wellknown risk in the bond market is interest rate risk  the risk that bond prices will fall as interest rates ... Read Answer >>