Interest rate risk

(2 Points)

For fixed-income securities, as interest rates rise security prices fall (and vice versa). This is because when interest rates increase, the opportunity cost of holding those bonds increases that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have less appeal as rates rise.

For variable-income securities, as interest rates fall security prices rise (and vice versa). This is because when interest rates decrease, the opportunity cost of holding those bonds decreases that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have higher appeal as rates rise

For fixed-income securities, as interest rates rise security prices rise. This is because when interest rates increase, the opportunity cost of holding those bonds increases that is, the cost of missing out on an even better investment is lower. The rates earned on bonds therefore have less appeal as rates rise

For variable-income securities, as interest rates fall security prices rise (and vice versa). This is because when interest rates increase, the opportunity cost of holding those bonds increases that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have less appeal as rates rise