Glossary: FI Module 10 — Interest Rate Risk and Return
| Term | Definition |
|---|---|
| Interest rate risk | The risk that changes in interest rates will affect a bond’s value or return |
| Market price risk | The risk of a decline in bond price due to rising interest rates |
| Reinvestment risk | The risk that coupon payments are reinvested at a rate different from the original yield |
| Realized return | The actual return earned over a holding period, reflecting reinvestment rates and sale price |
| Duration gap | Macaulay duration minus the investment horizon; determines which risk dominates |
| Immunization | A strategy that matches portfolio Macaulay duration to the investment horizon to lock in the YTM |
| Macaulay duration | The weighted average time to receive a bond’s cash flows, using PV weights |
| Cash flow matching | Purchasing bonds whose cash flows exactly match the timing and amount of liabilities |
| Bullet portfolio | A portfolio with cash flows concentrated around a single date |
| Barbell portfolio | A portfolio with cash flows concentrated at short and long maturities |
| Ladder portfolio | A portfolio with cash flows distributed evenly across maturities |
| Structural risk | The risk of immunization failure due to non-parallel yield curve shifts |
See also: Interest Rate Risk