Interest Rate Risk is the potential for investment losses that result from a change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment will decline. The change in a bond's price given a change in interest rates is known as its duration.Investors can hedge against interest rate risk by investing in securities with different durations.For example, if an investor holds both short-term and long-term bonds, she will be protected if rates rise or fall because one type of bond will offset the loss on the other type.Investors can also use derivatives to hedge against changes in interest rates. Interest rate swaps, for example, allow two parties to exchange fixed and variable payments on predetermined dates. If one party believes that rates will fall while the other party believes that they will rise, they can enter into a swap agreement where they exchange payments based on their respective beliefs
