<p>Interest rate sensitivity refers to the degree to which an asset's price or a borrower's cash flows change in response to a change in interest rates. It is a crucial concept in macroeconomics and finance, used to assess the risk associated with interest rate fluctuations.</p>

<h2>How It Works</h2>
<p>Interest rate sensitivity is typically measured using duration and convexity for bonds, and value at risk (VaR) for loans and other financial instruments.</p>
<ul>
  <li><strong>Duration</strong> is a measure of the weighted average time until cash flows are received. It indicates how much the price of a bond will change for a given change in interest rates.</li>
  <li><strong>Convexity</strong> is a measure of the curvature in the relationship between a bond's price and its yield. It helps to refine the duration measure for large changes in interest rates.</li>
  <li><strong>Value at Risk (VaR)</strong> is a statistical technique used to quantify the risk of loss for investments. It estimates how much a set of investments might lose, given normal market conditions, over a specified time period.</li>
</ul>

<h2>Why It Matters</h2>
<p>Interest rate sensitivity is vital for investors and borrowers alike. For instance, a pension fund investing in long-term bonds may face significant losses if interest rates rise, as the price of these bonds will fall. Conversely, a homeowner with an adjustable-rate mortgage will see their monthly payments increase if interest rates rise, making it crucial for them to understand and manage their interest rate sensitivity.</p>