A type of risk that results from changes in interest rates, affecting the values of interest-bearing securities, instruments, and investments. For example, changes in interest rates can impact a debt security‘s value (e.g., that of a bond). If such securities are held to maturity, the investor (holder) will receive the face value (par value). In addition to repayment of face value, the security pays its holder a certain amount of interest over its life.

If sold before maturity, the security may be worth more or less than the face value, depending on market conditions. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones (as reflected in the premium), while the market value will be lower. To sell an earlier issued security with a lower interest rate before maturity, the holder will experience a sale at a discount (to face value).

In general, a change in market interest rates affects the value of a fixed-income security: as rates increase, the value of an instrument offering a fixed interest rate decreases (compared to the value of newly issue securities that come with higher rates). For an open position, i.e., a position that is not offset by taking position in other instruments to mitigate the effect of change in interest rates, the holder of such a security will incur an economic loss.