Definition of Interest Rate Risk

Financial Terms Beginning with I

What is Interest Rate Risk

Interest rate risk is the risk or probability for a loss in an investment when there is a change in interest rates. An increase in interest rates will usually have an adverse effect on the value of a debt security, such as a bond, as fixed-income investments are sensitive to changes in interest rates.

Bonds with a shorter time to maturity carry a smaller interest rate risk as compared to bonds with longer maturities. Long-term bonds carryy a higher probability of interest rate changes, which is why they carry a higher interest rate risk.

Glossary of Terms and Phrases

A financial dictionary or glossary is an essential tool to better understand the meaning of a specialized term or phrase. It would obviously make life much easier if everyone spoke the same language and used the same financial terms and phrases but that is not realistic.

We learn new languages to communicate with each other, transact business globally and to appreciate other cultures. Global finance is a specialized language that if understood and mastered, it will provide benefits that help to decrease risk and improve investment returns. Financial literacy is the foundation of developing good investment strategies and sound decision making.

Related Investment Terms

Commodity Risk

Foreign Investment Risk

Volatility Risk

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