Sunday, December 26, 2010

Interest Rate Risk

Interest rate risk refers to the risk of market interest rates moving and the associated impact on bond portfolios. In basic terms a bond portfolio will see its value fall if interest rates rise - this is because bond prices move inversely to interest rates. The key measure of the valuation impact of interest rates is 'duration' or sometimes called 'modified duration' - some managers will report the weighted average duration of their portfolio; indeed bond managers may note in their quarterly commentary whether they are "long" or "short" duration depending on their view of where interest rates are headed. Thus bond investors need to be aware of interest rate risk and where interest rates are trending.

Synonyms: Interest sensitivity, Duration risk, Interest rate sensitivity, Duration gap, Maturity gap, Rate risk
If you have any questions, or disagree with the definition, or if you have anything to add then please do add your comments in the box below.

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