Interest Rate Risk is the risk that arises when interest rates move against an investor (specially bond holders). A Bond’s interest rate risk depends on how sensitive its price is to the Market’s interest rate changes. The sensitivity depends on the bond’s maturity and the coupon rate of the bond.
Interest rate risk is common to all bonds, particularly bonds with a fixed rate coupon, even U.S. treasury bonds (many bonds pay a fixed rate of interest throughout their term; interest payments are called coupon payments,and the interest rate is called the coupon rate).
A fundamental concept while investing in bonds is that when market interest rates rise, prices of fixed-rate bonds fall. This phenomenon is what is called Interest Rate Risk.
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