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The assessment of interest rate risk is a very large topic at banks, thrifts, saving and loans, credit unions, and other finance companies, and among their regulators. The widely deployed CAMELS rating system assesses a financial institution's: C apital adequacy, A ssets, M anagement Capability, E arnings, L iquidity, and S ensitivity to market ...
Fixed income analysis is the process of determining the value of a debt security based on an assessment of its risk profile, which can include interest rate risk, risk of the issuer failing to repay the debt, market supply and demand for the security, call provisions and macroeconomic considerations affecting its value in the future.
Repricing risk is the risk of changes in interest rate charged (earned) at the time a financial contract’s rate is reset. It emerges if interest rates are settled on liabilities for periods which differ from those on offsetting assets. Repricing risk also refers to the probability that the yield curve will move in a way that influence by the ...
Maturity risk, or duration risk, is closely related to interest rate risk. Bonds with a longer term carry more risk because there is a longer period during which interest rates may rise.
Reinvestment rate risk is the chance that an investment will produce lower than expected income due to a future drop in interest rates. This risk is most closely associated with fixed-income ...
The interest sensitivity gap was one of the first techniques used in asset liability management to manage interest rate risk. [1] The use of this technique was initiated in the middle 1970s in the United States when rising interest rates in 1975-1976 and again from 1979 onward triggered a banking crisis that later resulted in more than $1 trillion in losses when the Federal Deposit Insurance ...
Changes in term structure form one of the most important sources of risk in a portfolio. Unlike an equity price, which just moves one-dimensionally, the price of a fixed-income security is calculated from sum of discounted cash flows, where the discount rate used depends on the interest rate at that maturity. The magnitude and shape of curve ...
2010 OCC Interagency Advisory on Interest Rate Risk Management [9] (OCC 2010-1) In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates.