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Interest Rate Risk


Interest rate risk is the risk that arises for bond owners (Fixed coupon bearing Instrument owner) from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.

The sensitivity depends on two things, the bond’s time to maturity, and the coupon rate of the bond.

Interest rate risk is unquestionably the largest part of the Sensitivity analysis in the CAMELS system for most banking institutions.

CAMELS stand for:

Capital adequacy

Assets

Management Capability

Earnings

Liquidity

Sensitivity to market risk


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