Interest-Rate and Reinvestment Risk

Interest-rate and reinvestment risk analysis explains how changing rates affect market value, funding cost, income, and the return earned on future cash receipts. The right measure depends on whether the decision concerns a bond price, a borrower’s interest expense, a bank’s asset-liability mismatch, or reinvestment of coupons and principal.

Key Takeaways

• Interest-rate risk includes price sensitivity, repricing mismatch, yield-curve, basis, option, and reinvestment effects.
• Duration estimates present-value sensitivity; a repricing gap focuses on when rates reset or instruments mature.
• Economic-value and earnings measures answer different questions and should not be treated as substitutes.
• Reinvestment risk can rise when price duration falls because short maturities return principal sooner.
• Parallel rate shocks do not capture every yield-curve, basis, or option outcome.

Choose the Right Topic

Debt rollover belongs primarily to Liquidity Risk when the key question is whether maturing funding can be replaced. Higher refinancing cost also creates interest-rate and credit-spread effects.

Example in Use

Consider a bank that funds fixed-rate loans with deposits that can reprice quickly:

1. Rising deposit rates can reduce near-term net interest income.
2. Longer-duration loans can lose more economic value than deposits.
3. Borrower prepayments may change as rate incentives change.
4. Maturing securities may be reinvested at rates above or below prior assumptions.
5. A swap hedge may leave basis, collateral, and timing risk.

No single ratio captures all five effects.

Minimum Evidence for Review

Check:

• contractual maturity and next repricing date
• benchmark, spread, cap, floor, call, and prepayment terms
• market value, duration, DV01, and key-rate sensitivity
• asset and liability balances by time bucket
• deposit and borrower behavior assumptions
• net-interest-income and economic-value scenarios
• hedge benchmark, maturity, collateral, and effectiveness
• reinvestment amount, timing, and comparable alternatives
• liquidity needs created by margin or refinancing

Educational Use

This section is for financial education only. It does not evaluate a specific security, loan, bank, funding plan, or hedge and is not personalized investment, borrowing, accounting, legal, regulatory, or risk-management advice.

In this section

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