What is 'Interest Sensitive Stock'

An interest sensitive stock is a stock that is especially sensitive to changes in interest rates, including banks and companies that pay high dividends. Stocks, in general, tend to be sensitive to changes in interest rates. Low rates typically mean low interest rate expenses, and therefore higher levels of income. Low rates also affect valuations. Analysts use the risk-free rate when they determine the intrinsic value of a stock. And the rates on Treasury securities are used as the risk-free rate. A lower risk-free rate typically translates into a higher intrinsic value.

BREAKING DOWN 'Interest Sensitive Stock'

Some stocks are especially sensitive to interest rates, and for other reasons. Not all these reasons are the same for these stocks. Utilities, REITs and telecom companies, for example, often pay high dividends and are therefore owned for the income they generate for investors. For this reason, these stocks are often referred to as "bond substitutes." Just as bond prices decline when interest rates rise, so do these bond substitutes. When interest rates rise, investors shift out of these sectors on the belief that they can gain a similar level of income without the risk that stocks present.

Homebuilders may also see their share prices fall when interest rates rise. Rising interest rates mean higher mortgage rates, which can translate into fewer home purchases. Companies with large debt levels will also be very rate sensitive, as their cost of borrowing is likely to rise.

Banks are also especially sensitive to interest rates. Much of a bank's income comes from its net interest margin, the difference in the rate it pays on its bonds (and on to its account holders) and the rate it charges on the loans it makes. Because a bank typically borrows on a short-term basis and lends on a long-term basis, rising long-term rates typically boost the net interest margin, bank income, and therefore the price of its stock.

  1. Sensitivity

    Sensitivity is the magnitude of a financial instrument's reaction ...
  2. Net Interest Income

    Net interest income is the difference between the revenue that ...
  3. Interest Rate Sensitivity

    Interest rate sensitivity is a measure of how much the price ...
  4. Bank Rate

    A bank rate is the interest rate at which a nation's central ...
  5. Reference Rate

    A reference rate uses benchmarks, like the prime rate and the ...
  6. Interest Rate Call Option

    An interest rate derivative in which the holder has the right ...
Related Articles
  1. Financial Advisor

    Implications of the Federal Reserve's Impending Rate Hike

    The Federal Reserve begins its two-day meeting on Wednesday, September 16, and everyone is watching to see if the central bank will raise the United States target interest rate for the first ...
  2. Financial Advisor

    How Federal Reserve Activity Impacts Investment Portfolios

    The Federal Reserve's monetary policies impact investments in a number of ways.
  3. Investing

    Low Interest Rates: Where You Should And Shouldn't Invest

    Learn how low interest rates affect stock prices and how you should invest in low-rate times.
  4. Insights

    How the Federal Reserve Affects Individual Investors

    The Federal Reserve's decision on interest rates affects the whole economy.
  5. Insights

    5 Things To Do Before Interest Rates Go Up

    It is inevitable that interest rates will go up, but what should investors do to prepare themselves?
  6. Investing

    How to Prepare for Rising Interest Rates

    Get to know the basic, time-tested strategies that any investor or trader can use to prepare and profit in a rising interest rate environment.
  7. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  8. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
  9. Retirement

    How Higher Interest Rates Impact Your 401(k)

    Here's how a rise in interest rates will likely impact results in your 401(k).
  10. Managing Wealth

    Managing interest rate risk

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate and directly affects the values of fixed-income securities.
  1. Do high interest rates hurt the performance of telecommunication stocks? If so, why?

    Learn why many investors believe that telecommunications stocks tend to be very interest rate sensitive and how rising rates ... Read Answer >>
  2. How are bond yields affected by monetary policy?

    Learn about how bond yields are affected by monetary policy. Find out how this determines the risk-free rate of return and ... Read Answer >>
Trading Center