Definition
Interest rate risk is the potential for bond values to decline when market interest rates increase. Bond prices and yields move inversely. Longer-duration bonds have greater interest rate risk. This is the primary risk for fixed-income investors and can result in capital losses if bonds are sold before maturity.
Formula
Example
A bond with 10-year duration loses about 10% in value if interest rates rise by 1%.
FAQ
What is Interest Rate Risk?
The risk that bond prices will fall when interest rates rise.
How do you calculate Interest Rate Risk?
A common formula for Interest Rate Risk is: Approximate Price Change = -Duration × Yield Change
Why is Interest Rate Risk important?
Interest Rate Risk helps investors evaluate fixed income and make more informed decisions.
Related Terms
Duration (Bond)
A measure of a bond's price sensitivity to interest rate changes.
Convexity
A measure of the curvature in the relationship between bond prices and yields.
Floating Rate Bond
A bond with interest payments that adjust based on a reference rate.
Yield Curve
A graph showing interest rates of bonds with equal credit quality but different maturity dates.