Interest Rate Risk
What is Interest Rate Risk?
Interest rate risk is the risk any investor takes on when holding an asset whose value is derived from interest rates, with the most common example being bonds. Bond prices are inversely proportioned to interest rates, so if interest rates rise the price of a bond will fall. A bondholder is exposed to interest rate risk (i.e. the risk that their bond price will fall if central banks raise interest rates). It is possible to hedge against interest rate risk through inversely correlated assets, diversification and hedged derivatives.