Common use of Interest Rate Risk Clause in Contracts

Interest Rate Risk. Investments in fixed-interest instruments involve the risk that the market rates prevailing when the instrument is issued might subsequently change. If market rates rise compared to the inter- est rates at the time of the issue, the price of the fixed-interest instrument usually falls. By con- trast, if market rates fall, the price of the fixed-interest instrument rises. Such price movements mean that current yields on the fixed-interest instruments more or less correspond to the current market interest rate. However, such price fluctuations vary according to the (residual) maturity of the fixed-interest securities. Fixed-interest securities with shorter maturities are less exposed to price risks than those with longer maturities. On the other hand, fixed-interest securities with shorter maturities normally have lower yields than those with longer maturities. Because of their short maturities (max. 397 days), money market instruments tend to have a lower exposure to price risks. Moreover, the interest rates for different interest-bearing instruments may vary, even when those instruments have comparable maturities and are denominated in the same cur- rency.

Interest Rate Risk. Investments in fixed-interest instruments involve the risk that the market rates prevailing when the instrument is issued might subsequently change. If market rates rise compared to the inter- est interest rates at the time of the issue, the price of the fixed-interest instrument usually falls. By con- trastcontrast, if market rates fall, the price of the fixed-interest instrument rises. Such price movements mean that current yields on the fixed-interest instruments more or less correspond to the current market interest rate. However, such price fluctuations vary according to the (residual) maturity of the fixed-interest securities. Fixed-interest securities with shorter maturities are less exposed to price risks than those with longer maturities. On the other hand, fixed-interest securities with shorter maturities normally have lower yields than those with longer maturities. Because of their short maturities (max. 397 days), money market instruments tend to have a lower exposure to price risks. Moreover, the interest rates for different interest-bearing instruments may vary, even when those instruments have comparable maturities and are denominated in the same cur- rencycurrency.