Interest Rate Risk
The risk that changes in interest rates reduce the value of an investment or raise the cost of borrowing.
Formula
Approximate Price Change = -Modified Duration x Change in Yield
Unit
%
In depth
Bond prices move inversely to yields, and the sensitivity is measured by duration — a long-duration bond can lose far more from a rate rise than a year of its coupon pays. Equities carry it too, through two channels: higher rates raise the discount rate applied to future cash flows, hitting long-duration growth stocks hardest, and they raise the interest cost of leveraged companies. Floating-rate borrowers face it on the liability side, where a rate rise increases outgo directly. It is a systematic risk that diversification within an asset class cannot remove.
Worked example
A bond with a modified duration of 7 loses about 7 x 1 = 7% of its price if yields rise one percentage point. On a 7% coupon, that is a full year of income erased by a single move in rates.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Interest Rate Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.