Fixed Income and Interest Rate Risk

Interest rates are a key component in many market prices and represent an important economic barometer. Fixed-income securities, which include bonds, treasury bills, and commercial papers, pay a fixed rate of interest. The yield curve, a graph that depicts the relationship between bond yields and maturities, is an important tool in fixed-income investing. Economists and fixed-income portfolio managers put great effort into trying to understand exactly what forces are driving yields at any given time and at any given point on the yield curve. An investor in a fixed income security is exposed to a certain number of different risks. These risks are credit and default risk of the issuer, interest rate risk, inflation risk, liquidity risk and currency risk among the most significant ones. Interest rate risk is most probably the most important risk because of the strong relationship between interests and bond prices. Controlled Vocabulary Terms net present value (NPV)