What is interest rate risk?
Interest rates risk is the risk that changes in interest rates impact the profitability of a company. Interest rates are external to a company as they are controlled by the Fed (in the US) or a similar governing body. Basically, if interest rates rise, the cost of doing business can increase and impact the company’s profitability.
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How can a company or investor mitigate interest rate risk?
First off, interest rate risk is when earnings and profits are impacted by fluctuations in interest rates, which would be out of the company’s control. Several ways to mitigate interest rate risk are to invest in floating rate debt securities or enter into derivative contracts.