Interest Rate Risk

Interest rate risk refers to the potential for financial loss that arises when interest rates change. For instance, if you own bonds and interest rates rise, the value of your bonds may fall because new bonds will offer higher returns, making your older bonds less attractive. This risk affects anyone holding fixed-income investments, such as bonds or loans. Conversely, when interest rates fall, existing bonds typically increase in value. Managing this risk is vital for investors and financial institutions to protect their investments and ensure stable returns.