Rate risk

What is rate risk?

This is the chance that the value of an investment will change due to a fluctuation in interest rates.

Where have you heard about rate risk?

If you're a bond owner, you might have heard that any sudden rise in interest rates could cause your investment to lose value. It's sometimes also known as market risk.

What you need to know about rate risk.

Bond prices normally fall when interest rates rise, but how much interest rate risk a bond has depends on how much its price will be affected by these changes. This depends on both the bond's time to maturity and its coupon rate. One way in which investors try to deal with interest rate risk when buying bonds is by diversifying their portfolios, for example by investing in fixed-income securities with different durations.

Find out more about rate risk.

Interest rate risk is also an important factor in interest rate swaps. Find out more about these here.