Interest Rate Risk
The risk that rising rates push existing bond prices down.
What is Interest Rate Risk?
Bond prices and yields move inversely. When new bonds are issued at higher coupons, existing lower-coupon bonds must fall in price to compete. Duration quantifies the exposure.
Interest Rate Risk: a worked example
In 2022 long Treasuries fell over 30% as rates rose sharply.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.