Economics Risk And Return Questions
Interest rate risk refers to the potential for changes in interest rates to negatively impact the value of an investment or a portfolio. It arises from the fact that interest rates have a direct impact on the present value of future cash flows. When interest rates rise, the value of fixed-income securities, such as bonds, decreases because their fixed interest payments become less attractive compared to the higher prevailing rates. Conversely, when interest rates decline, the value of fixed-income securities increases. Therefore, interest rate risk is the possibility of experiencing losses or gains due to fluctuations in interest rates.