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Organisations are faced with many risks, which include many types of economic risks, among them interest...

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Finance

Organisations are faced with many risks, which include manytypes of economic risks, among them interest rate risks. Based onthe above background

  1. Describe and discuss the different types of interestrisk
  2. Describe the characteristics and benefits of interestrate swaps compared with other forms of interest rate riskmanagement, such as forward rate agreements and interest ratefutures

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Interest rate risk Interest rate risk is also known as market risk This risk is associated with fixed income securities Like bonds The risk is caused due to increase or decrease in the interest rates of the securities For example if an investor is having a bond of 400 carrying an interest rate of 4 when the interest rate raises to 5 the investor is supposed to get higher value for the bond But the other investors usually prefer to go for newly issued bonds because they will having higher coupon rate due to which the investor end up selling it for lower price Similarly In case of decrease in interest rate the investor has to sell it for fixed rate of return    See Answer
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