Answer :
Interest rate risk is the possibility of receiving less money when selling a bond than its market value.
How does interest rate risk work?
- The danger associated with changing interest rates is known as interest rate risk.
- The sensitivity of a bond's price to fluctuations in market interest rates determines how much interest rate risk it carries.
- The sensitivity is determined by the bond's coupon rate and remaining maturity time.
- To guarantee that the yield curve movements are both consistent with actual market yield curves and such that no riskless arbitrage is conceivable, interest rate risk analysis is nearly usually based on simulating movements in one or more yield curves using the Heath-Jarrow-Morton framework.
- Early in 1991, David Heath of Cornell University, Andrew Morton of Lehman Brothers, and Robert A. Jarrow of Kamakura Corporation and Cornell University created the Heath-Jarrow-Morton framework.
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