The price of a bond changes as interest rates change. Specifically, price moves in the opposite direction to the change in interest rates. That is, if interest rates increase, the price of a bond will decline; if interest rates decrease, the price of a bond will increase. This is the reason a bond will sell [...]
Tag Archives: interest rate risk
Interest rate risk
Saturday, November 14, 2009
Bank balance sheets are made up of a mix of fixed and floating rate assets and liabilities whose composition is continually changing over time. A bank that makes a lot of fixed rate loans, such as car loans, funded with floating rate deposits is exposed to the risk that interest rates rise. This will push [...]