Outline of Session Outline of Session 4
Outline of Session Outline of Session 4
Outline of Session Outline of Session 4
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Interest Rate Risk (or Price Risk)<br />
Interest Rate Risk sometimes is called “Price Risk”.<br />
Investment in bonds (even in a risk−free bond like a<br />
government bond) can be risky due to fluctuation in<br />
the market interest rates.<br />
As you can see, when the market interest rate goes up,<br />
bond price declines, and vice versa, resulting in a gain<br />
or loss.<br />
Notes:<br />
Bond price does not decline in linear fashion.<br />
The longer the maturity <strong>of</strong> a bond, the greater the<br />
price risk, other things being equal. Why?<br />
The lower the coupon rate <strong>of</strong> a bond, the greater the<br />
price risk, other things being equal. Why?<br />
Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. <strong>Session</strong> 4 | Slide 9 <strong>of</strong> 19
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