Glossarytaught in FI1.02, M5.01
Interest rate risk
Also called rate risk, duration risk.
The exposure of a portfolio's value or a firm's earnings to a change in interest rates.
Hold a ₹5,000 crore bond portfolio with a modified duration of 6.8, and you lose about ₹340 crore in value if yields rise by one percentage point.
For a bank the risk appears twice: as a mark-to-market loss on the securities book, and as a squeeze on the margin when assets and liabilities reprice at different speeds.
Banks measure the second with the repricing gap, disclosed by time bucket.