Interest rate risk is a risk that the value of investment will change due to a
change in the absolute level of interest rates, in the spread between two rates, in any other interest rate relationship.
Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by
switching to other investments that reflect the higher interest rate. As example, a 5% bond is worth more if interest rates decrease since the bondholder
receives a fixed rate of return relative to the market,
which is offering a lower rate of return as a result of the decrease in rates.