What is interest rate risk? Explain the interest rate sensitivity policy and discuss its broad parameters.

Interest rate risk

Interest rate risk is the potential for investment losses that result from a change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment will decline. The change in a bonds price given a change in interest rates is known as its duration Interest rate risk can be reduced by holding bonds of different durations, and investors may also allay

interest rate risk by hedging fixed-income investments with interest rate swaps, options, or other

interest rate derivats Interest rate changes can affect many investments, but it ìmpacts the value of bonds and other fixed-income securities most directly. Bondholders, therefore, carefully monitor interest rates and make decisions based on how interest rates are perceived to change over time

The interest rete sensitivity

For fixed-income securities, as interest rates rise security prices fall (and vice versa). This is because when interest rates increase, the opportunity cost of holding those bonds increases — that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have ___ ____ ___ __________ ________ ________ _______ _______ _________.
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