Interest rate risk is the probability of a decline in the value of an asset resulting from unexpected fluctuations in interest rates.
Interest rate risk is defined as the risk of change in the value of an asset as a result of volatility in interest rates.
The risk of losing money because interest rates move up or down. For example,
The value of bonds in a portfolio can be reduced if interest rates move higher and the value of the interest rate paid on the bond remains set.
Let's assume you purchase a bond from Company XYZ.
Because bond prices typically fall when interest rates rise, an unexpected increase in interest rates means that your investment could suddenly lose value.
If you expect to sell the bond before it matures, this could mean you end up selling the bond for less than you paid for it (a capital loss). Of course, the magnitude of change in the bond price is also affected by the maturity, coupon rate, its ability to be called, and other characteristics of the bond.
One common way to measure a bond's interest rate risk is to calculate its duration.