<h2>Interest Rate Risk</h2>
<p>Interest rate risk, a fundamental concept in finance, refers to the potential loss in value of a financial instrument or portfolio due to changes in interest rates. It's a significant consideration for traders, investors, and financial institutions.</p>

<h2>How It Works</h2>
<p>The relationship between interest rates and bond prices is inverse: as interest rates rise, bond prices fall, and vice versa. This is because the yield (return) of a bond becomes less attractive when interest rates increase, making existing bonds less valuable. Conversely, when interest rates decrease, the yield of existing bonds becomes more attractive, increasing their market value.</p>
<p>For floating-rate instruments, interest rate risk is less pronounced as their coupon payments adjust with changes in interest rates. However, they may still be affected by changes in the yield curve's shape.</p>

<h2>Why It Matters for Traders</h2>
<ul>
  <li><strong>Portfolio Value</strong>: Interest rate risk can significantly impact the value of a trader's portfolio, especially those heavily invested in bonds or fixed-income securities.</li>
  <li><strong>Hedging Strategies</strong>: Traders use derivatives like interest rate swaps and options to hedge against interest rate risk. Understanding this risk helps in designing effective hedging strategies.</li>
  <li><strong>Yield Curve Trading</strong>: Traders can exploit interest rate risk by engaging in yield curve trading, profiting from changes in the shape of the yield curve.</li>
</ul>

<h2>Example</h2>
<p>Consider a trader holding a 10-year bond with a 5% coupon, originally purchased at par (100). If market interest rates rise to 6%, the bond's price will fall to approximately 90.57, representing a loss of 9.43% due to interest rate risk.</p>

<h2>Key Takeaways</h2>
<ul>
  <li>Interest rate risk is the potential loss in value of financial instruments due to changes in interest rates.</li>
  <li>Bond prices and interest rates have an inverse relationship, while floating-rate instruments' values are less sensitive to interest rate changes.</li>
  <li>Interest rate risk can significantly impact portfolio value, influence hedging strategies, and present opportunities for yield curve trading.</li>
</ul>