Interest Rate Risk
Chapters in this video
- 0:00 The inverse relationship: bond prices and interest rates as a seesaw
- 1:30 Ivy's dilemma: why rising rates force existing bonds to discount
- 2:57 Two factors that escalate risk: longer maturity, lower coupon
- 4:03 Zero-coupon bond danger: maximum risk, maximum exam trap
- 5:40 Duration explained: the price-sensitivity multiplier
- 6:44 Rapid-fire exam recap
What this video covers
- Why bond prices fall when interest rates rise, using the seesaw rule and Ivy's discounted-bond example
- How longer maturity increases interest rate risk, since more time means more opportunity for rates to move against you
- Why lower coupon bonds have greater interest rate risk, with less cash flow cushioning price swings
- Why zero-coupon bonds carry the highest interest rate risk, and why students consistently pick the wrong answer
- What duration measures: a bond's price sensitivity to a 1% rate change, expressed as a multiplier
- Why zero-coupon bond duration equals maturity, and how high-coupon bonds pull duration shorter through earlier cash flows
- How the SIE test writers dress up the inverse relationship in complex scenarios, and the reflex that locks in the right answer
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. The complete SIE course in the app is free too, including adaptive practice questions and spaced-repetition flashcards.