The risk that changes in interest rates reduce the value of positions or earnings. Duration and convexity measure its effect on bond prices.
Where you will meet it
Interest rate risk comes up in 15 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“A bank's principal risks are credit, market, operational and liquidity risk, with interest rate risk in the banking book as an important relative.”
How Do Firms Manage Financial Risk? FRM Part I · Foundations of risk management
“For interest rate risk, a borrower with floating debt pays fixed on a swap, and a portfolio is hedged by selling futures until its DV01 matches the target.”
Applying Duration, Convexity, and DV01 FRM Part I · Valuation and risk models
“To hedge interest rate risk with DV01, choose a hedge position whose total DV01 equals that of the position being hedged, with the opposite sign.”
The Investment Function in Financial-Services Management FRM Part II · Liquidity and treasury risk measurement and management
“Selection factors are credit quality, marketability, maturity and interest rate risk, call or prepayment risk, tax status, pledging requirements and regulatory liquidity treatment.”
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