Which type of asset is particularly highlighted for having interest rate risk?

Bonds are particularly highlighted for having interest rate risk because they operate based on fixed interest payments, known as coupon payments. When interest rates in the broader market rise, existing bonds with lower rates become less attractive, causing their prices to fall. This inverse relationship is a key characteristic of bonds; as rates rise, new bonds are issued with higher yields, making older bonds (which pay lower yields) less desirable.

Additionally, the longer the duration of the bond, the more sensitive it is to changes in interest rates. This is due to the extended period over which the fixed payments are calculated. For investors in bonds, this creates a potential for capital loss if they need to sell their bonds before maturity in a rising interest rate environment. Understanding this risk is crucial for bond investors and highlights why bonds are uniquely susceptible to fluctuations in interest rates.