What type of risk are fixed income securities subject to regarding changes in interest rates?

Fixed income securities are particularly sensitive to changes in interest rates, and this sensitivity is primarily measured by duration risk. Duration risk refers to the potential for bond prices to fluctuate as interest rates change. When interest rates rise, the price of existing fixed income securities generally falls, and conversely, when interest rates decline, the price of these securities typically increases.

This relationship arises because fixed income securities, such as bonds, pay a set interest based on their coupon rate. If prevailing interest rates go up, newly issued bonds or fixed income securities start offering higher returns, thus making existing bonds with lower rates less attractive. Since duration measures the weighted average time until a bond’s cash flows are received, securities with longer durations are more affected by changes in interest rates, reflecting a greater duration risk.

The other types of risks listed do not specifically capture this relationship to interest rate changes in the same manner. Liquidity risk pertains to the ability to sell an asset quickly without drastically affecting its price. Market risk is a broader term that includes various factors affecting all investments, particularly equity markets rather than just fixed income. Credit risk involves the potential for a bond issuer to default on payments, which is distinct from the effects of interest rate changes. Understanding duration risk is crucial for managing