Interest rate risk is concerned with a decline in the price of a bond or a portfolio of bonds due to an increase in market rates.

As rates increase, bond prices decline and vice versa. The features of a bond affect the bond's interest rate in the following ways: Recognize that the various bond features work with or against each other in determining a bond's price volatility.

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As market yield volatility increases, the interest rate risk increases. This is because there is a greater chance of rates breaking out of their current ranges, either by rising or declining.

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Typically, as rates increase there is a greater chance of this risk occurring because market prices of bonds will decline as interest rates rise. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

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Maturity - The longer the maturity of the bond, the more sensitive it is to interest rate movements. The reason for this effect is that more cash flows will be affected over a longer period of time.

Coupon Rates - Lower coupon rates are more sensitive to interest rates. Embedded Options - As interest rates decline the value of the option becomes more valuable to the issuing company. The price will increase as rates decline but will be held at the call or redemption price. This is because as rates decline it will become more likely that the issuer will interest rate options trading jobs the bonds and that the holder will make money fast phoenix az receive the call price and not a true market price.

Likewise, when rates rise the price will not drop as much because the option will maintain some sort of value when compared to a bond with no options.

It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses. A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider. Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.

Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.

Get to know the relationships that determine a bond's price and its payout. Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk. Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.

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