Ch.10 · Benchmarks and Performance Evaluation · easy
What is 'interest rate risk' in debt mutual funds?
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EXPLANATION
Interest rate risk arises from the inverse relationship between bond prices and interest rates. When interest rates rise, existing bond prices fall (since newer bonds offer higher rates, making existing bonds less attractive). Longer duration portfolios are more sensitive to interest rate changes — a 1% rate rise causes NAV to fall by approximately the fund's Macaulay duration.
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