Interest Rate Risk Definition & Meaning | Financial Term | CSIMarket
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Glossary

Interest Rate Risk

Financial Term

Interest rate risk refers to the exposure that an entity, such as a bank, may face due to fluctuations in interest rates. This risk arises because the value of assets and liabilities may change in response to changes in interest rates.

The financial industry uses interest rate risk management to ensure that banks, for example, are able to fund themselves at a stable interest rate. This is achieved through a variety of means, such as using derivatives to hedge against interest rate changes, altering the mix of assets and liabilities, and using various funding sources.

In addition, interest rate risk is a key consideration for investors. Those who are invested in fixed income securities may be exposed to interest rate risk, as the price of these securities tends to fall when interest rates rise. As a result, investors may use various strategies, such as diversification and duration matching, to manage this risk. Overall, effective management of interest rate risk is essential to ensure stability and profitability in the financial industry.


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