Interest Rate Risk

Interest rate risk is the potential for investment losses that can be triggered by a move upward in the prevailing rates for new debt instruments. If interest rates rise, for instance, the value of a bond or other fixed-income investment in the secondary market will decline. The change in a bond's price given a change in interest rates is known as its duration.

Rising interest rates affect different types of retirement savings and investments in various ways. Depending on the type of investments you have in your 401(k) or other retirement plan, rising interest rates may have a positive or negative effect. How you react to them can also be one of the more serious risks in retirement.

Rising interest rates affect stocks and bonds in different ways. Stocks historically lose value during times of higher interest rates, and they tend to suffer more when high inflation is present. This trend tends to reverse itself when interest rates start falling again. Bonds and other fixed-income investments tend to perform better than stocks in high-interest environments. Bonds, for example, are still likely to lose value but not as much as stocks and only in the short term. Falling interest rates make existing bonds more valuable.