Interest rate risk is the risk that bondholders might face when interest rates actually rise. A rise in interest rates actually cause the value of the bond to drop.
This is because usually your bond coupon payments have been fixed at a certain rate, but with higher interest rates, you can actually invest in other investment products that reflect the higher returns from the higher interest rate climate. If you were to sell your bond now, you would most likely have to sell it below the par value which you bought it at, so it's a loss.
For bonds that have longer maturities, a rise in interest rates will affect the value of the bonds more. This is because the coupon payments of the bonds have all been priced into the bonds, so higher interest rates will affect them a lot more.
One way you can counter against this is through buying putable bonds. These are bonds that allow you to redeem the principal of the bonds early, in the scenario that interest rates rise.
Another way you might be able to hedge against this risk is to buy inflation-linked bonds, such that if inflation rises, and if the government raises interest rates, you might be protected as well.
Interest rate risk is the risk that bondholders might face when interest rates actually rise. A rise in interest rates actually cause the value of the bond to drop.
This is because usually your bond coupon payments have been fixed at a certain rate, but with higher interest rates, you can actually invest in other investment products that reflect the higher returns from the higher interest rate climate. If you were to sell your bond now, you would most likely have to sell it below the par value which you bought it at, so it's a loss.
For bonds that have longer maturities, a rise in interest rates will affect the value of the bonds more. This is because the coupon payments of the bonds have all been priced into the bonds, so higher interest rates will affect them a lot more.
One way you can counter against this is through buying putable bonds. These are bonds that allow you to redeem the principal of the bonds early, in the scenario that interest rates rise.
Another way you might be able to hedge against this risk is to buy inflation-linked bonds, such that if inflation rises, and if the government raises interest rates, you might be protected as well.