Interest Rate Risk

Interest rate risk is the potential drop in a fixed income security’s value due to interest rate fluctuations. When interest rates increase, the value of fixed income securities, like bonds, typically decreases; conversely, they gain value when rates decline. This inverse relationship stems from the fixed cash flows of these instruments becoming less attractive as rates shift. Unlike fixed income securities, equity shares and similar securities are not directly subject to interest rate risk, as their valuation depends more on company performance and market dynamics rather than interest rate changes.