Interest rate risk
Also known as: duration risk
Interest rate risk is the risk that a 's falls because interest rates rise after the was purchased. Since a 's is fixed at issuance, a rise in prevailing rates makes that fixed payment less attractive relative to newly issued paying more, which pushes the price of the existing down to compensate.
The size of this risk is not the same for every . Longer maturity and with lower carry more interest rate risk, measured by their duration, than shorter maturity and with higher , because more of their value depends on cash flows further in the future, which are more sensitive to rate changes. An investor who intends to hold a until maturity does not realize this risk as an actual loss, since the will still repay its at maturity regardless of what happened to its price in between, but anyone who might need to sell before maturity is exposed to it.
Interest rate risk affects the entire market at once, unlike , which is specific to an individual issuer, and it is the reason prices and yields move as a whole when the changes policy or when broader expectations for future rates shift. Managing this risk is one of the main reasons investors build a or use , rather than concentrating a fixed income at a single maturity.