What is interest rate risk?

by Ad Min - **Example one:**You have some money with your bank on a savings account. It earns, lets say 2% on an annualized basis. You receive a notice that the interest rate you will be receiving from now on will be 1.8%. Since you had not fixed your rate for a longer period, you are now going to be receiving lower interest

**Example two:**You take out a mortgage to buy a home that is linked to an interest rate index (depending on country this could be prime rate, LIBOR, EURIBOR etc.). The index was 3% when you did the borrowing, and then went down to 2.8%. Since you had not fixed your mortgage rate, you are now going to be paying lower interest. The exact opposite would happen in both cases if interest rates were to rise. Ultimately these interest rates very because of fluctuations in the supply and demand of deposits and loans for different fixed time periods.