What Does Interest Rate Risk Measure?

Interest rate risk is a term given to the risk that you take that the relative worth of a security, in particular a bond, will deteriorate as a result of an interest rate increase. The bond's duration is usually used to measure this particular risk. Thus, in other words, it is risk to the possible earnings or to the market value of a given portfolio attributable to uncertain future interest rates.

The potential price differences seen in the values of bonds which are the result of interest rate changes are often believed to be presently more volatile when considered as a class as compared to stock price changes.

There are essentially two different two ways in which one can approach Interest rate risk. These would be a book value perspective and what is called a market value perspective (which is sometimes referred to as an economic perspective).

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