As we've discussed before, the duration of a bond fund is an important indicator of its risk level because the longer the duration, the more the fund's price will fluctuate as a result
of changes in market interest rates.
A cash flow hedge lets a business hedge the uncertainty of cash outflow in interest payments on its variable - rate liability
against changes in market interest rates by swapping to a fixed - rate liability.
Because credit and default risk are the dominant drivers of valuations of high yield bonds,
changes in market interest rates are relatively less important.
Changes in market interest rates.
It's interpretation is roughly: «duration equals the expected percent change in value of the security that will result from a 1 %
change in the market interest rates».
However, due to their short duration,
any change in market interest rates would have a relatively small market risk effect on T - bill prices.
As a bondholder, the most important concept to be aware of is that the price of a bond has an inverse relationship to
changes in the market interest rates.
Bond prices fluctuate daily in response to
both changes in market interest rates and the credit quality of the underlying issuer.
Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to
changes in market interest rates.