Interest rate risk in bonds definition
Bonds are affected by interest rate risk most directly, as base rate change tends to have an inverse relationship to the price of bonds.
This is because a raise in interest rates may make other investments more attractive than bonds, which can then see the yield of new bonds increase to make them a viable investment. If this happens, a long term bond bought when interest rates where lower could be less valuable, and therefore harder to sell.
How much interest rate risk a bond has, depends on how sensitive its price is to interest rate changes in the market, which will be affected by the bond’s time to maturity and coupon rate.
One way of reducing the risk of interest rate changes is by diversifying your portfolio, for example by investing in fixed-income securities with different durations, or by hedging.