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Interest rate risks
F T M O
Interest rate risks refer to the potential losses that can occur when interest rates change.
F T M O
This type of risk affects investments, mortgages, and other financial instruments that are tied to a specific interest rate. When interest rates rise or fall, it can cause the value of these instruments to decrease significantly. For example, if an investor holds a bond with a fixed-rate coupon and interest rates increase, the bond's price will drop as its yield becomes less attractive than higher yielding alternatives. Similarly, borrowers may face increased repayment costs on variable rate mortgages if base lending rates go up.
Interest rate risks - T r a d i n g J o u r n a l
To mitigate these risks, investors can diversify their portfolios by investing in different types of bonds with varying maturities and coupons while borrowers may opt for fixed-rate mortgage products instead.
T r a d i n g J o u r n a l
Frequently Asked Questions
What is interest rate risk?
Interest rate risk is the risk of a securitys value changing due to a change in the prevailing levels of market interest rates.
How can investors mitigate interest rate risks?
Investors can mitigate interest rate risks by diversifying their portfolio, using hedging strategies such as futures and options, and by investing in securities with low correlation to changes in market interest rates.
What are the potential rewards associated with taking on interest rate risk?
Potential rewards from taking on interest rate risk include higher returns compared to lower-risk investments, increased diversification benefits, and access to new investment opportunities.