Interest Rate Risk

Interest rate risk is the potential for investment losses due to fluctuations in interest rates. When rates rise, bond prices typically fall, and when rates drop, bond prices tend to increase. This risk primarily affects fixed-income investments, but it can also impact stocks, real estate, and other assets.

How Interest Rate Risk Affects Different Investments:

• Bonds → Longer-term bonds suffer more when rates rise because their fixed payments become less attractive.
• Stocks → Higher rates increase borrowing costs for companies, potentially lowering profits and stock prices.
• Real Estate → Mortgage rates rise, making homes more expensive and reducing demand.

Managing Interest Rate Risk:

• Invest in shorter-duration bonds (less affected by rate changes).
• Diversify into stocks, commodities, and alternative assets.
• Use hedging strategies, like interest rate swaps.

See also: Bonds