Business and Personal Finance Dictionary

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• INTEREST RATE RISK (IRR)
  
  The potential that changes in market rates of interest will reduce earnings and/or capital. The risk that changes in prevailing interest rates will adversely affect assets, liabilities, capital, income, and/or expense at different times or in different amounts. The Federal Reserve calls this type of risk market risk and defines it as the risk to a financial institution’s condition resulting from adverse movements in market rates or prices, such as interest rates, foreign exchange rates, or equity prices. Within that definition, the Federal Reserve clearly views interest rate risk as just one component of market risk. The Office of the Comptroller of the Currency (OCC) defines interest rate a bit more narrowly than the Federal Reserve since it defines price risk as a separate risk. The OCC defines price risk as the risk to earnings or capital arising from adverse changes in the value of portfolios of financial instruments. Since such adverse changes generally result from changes in prevailing interest rates, price risk is essentially the same as interest rate risk. Most rate risk managers use the term in the broadest sense as defined in the first sentence of this paragraph. Interest rate risk has four components. See basis risk, mismatch risk, option risk, and yield curve risk. Closely related to price risk and market risk.
  
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