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The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities imply the need for the banking system to hedge the Interest-Rate Risk. Interest Rate Risk is the risk where changes in market interest rates might adversely affect the Bank’s Net Interest Income. The gap report should be generated by grouping interest rate sensitive liabilities, assets and off balance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier. Interest rates on term deposits are fixed during their currency while the advance interest rates are floating rates. The gaps on the assets and liabilities are to be identified on different time buckets from1–28 days,29 days upto3 months and so on. The interest changes should be studied vis-a-vis the impact on profitability on different time buckets to assess the interest rate risk.
Interest rate risk is the risk that arises for bond owners 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.
The risk of getting a surplus out of lending is interest rate risk for the Banker. If the difference between cost of funds and the income from lending such funds narrows, the risk begins. Difference must be capable of servicing the loan, and control all the incidental expenses for servicing the loan. When the difference get narrowed to the zero level, the risk of loss starts. The fluctuating nature of the money market also determine the level of interest risk.
The same way, a borrower is also facing interest risk, many often he may required to pay higher rate of interest on borrowed funds when the market for such funds with other borrowers tend to ease for the interest.
Interest rate risk is the chance that an unexpected change in the interest rates will negatively affect the value of your investment
Interest rate risk is how much the value of your investment is likely to change with a change of interest rates.
I agree with Mr. Vinod Jetley asnwer. very well explained
Vinod Jetley Assistant General Manager at State Bank of India
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maybe while war is be less than another and not like before
Agree with the colleague's answers
Fluctuation of interest rate.
Interest Rate risk refers to changes in the interest rates.
A rise in the interest rate during the term of an investors debt security, hurt the performance of stocks and bonds.
Agree with Mr.Jaitley
