Institutional investors turned up their noses on hybrid bonds, hesitant to take the interest rate risk if LIBOR remained minimal.
Credit derivatives have made it easier to separate the credit risk (the danger of default) of bonds from the interest rate risk.
All things equal, for typical bonds the longer the maturity the higher the duration (or price volatility from interest rate movements), and the smaller the coupon the higher the interest rate risk.
One major risk (other than the obvious interest rate risk) for swap investors is that of counterparty risk.
Both companies guarantee the creditworthiness of these bonds, but not the interest-rate risk.
While immune from credit risk, Agency MREITs have their own financial kryptonite in the form of interest rate risk.
Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve.
Keep in mind that municipal securities are subject to a number of risks including, but not limited to: Interest Rate Risk, the risk that the market value of fixed-income securities may fluctuate when interest rates change, and Prepayment Risk, the risk that the issuers of individual securities may prepay them at a time when interest rates have declined.
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Interest rate risk is the risk that interest rates will change significantly from what the investor expected.
The Fed worked hard in June to increase the awareness of the inflation risk, causing interest rate expectations to rise.
He further pointed out that some bond investors are viewing credit risk (the chances of a company defaulting on its debt) as less of a concern than interest rate risk (the chances of interest rates rising).
And prime rate would clearly be the wrong interest rate to use for Apple cannot lend money out, risk free, at the prime rate.
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Now consider this: the Federal Reserve's quantitative easing III tactic explicitly targets the "risk free interest rate" - aiming to set it at a historic low, and thus influencing all related interest rates downwards.
Mr. BRIAN MONTGOMERY (Federal Housing Commissioner, U.S. Department of Housing and Urban Development): And that's the main difference between FHA and the subprime, is we price for the risk with an insurance premium, whereas in most of the subprime world, they price the risk in the interest rate.
But such mortgages are cheaper than fixed-rate mortgages, because they shift the risk of interest-rate fluctuations from lender to borrower.
Adding to the complexity is the need for both Fannie and Freddie to insure their portfolios against interest-rate risk in particular, the danger that borrowers may pay back their loans early, if interest rates fall, leaving the companies with money to reinvest at a lower rate.
Although the investments resembled bonds, paying buyers a fixed interest rate for taking on the default risk of corporate debt, the products invested in synthetic collateralized debt obligations held by Lehman.
Therefore, with most loans, the lower your credit score, the higher your interest rate will be to compensate for the increased risk of lending you money.
Stretching it even more would expose the government to huge interest-rate risk.
Only when one starts with the proper interest rate as the base and then goes on to take various risk factors into account, can investments be properly valued.
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Long bonds usually have higher coupons than short ones, as investors demand a premium for exposure to the risk of interest-rate rises and inflation.
Spanish banks like Santander and BBVA hold more than 40% of the outstanding sovereign debt of Portugal (valued at about 60 billion euros), which carries an eye-wateringly high interest rate reflective of the risk that the county will default on some of its payments.
As default risk is the primary driver of high-yield corporate bond prices, as opposed to interest rate direction, when the economy expands, the risk of high-yield corporate bonds defaulting is reduced and this is reflected in lower volatility.
Spain was unable to borrow the maximum 3.5bn euros it wished to do - and investors ended up demanding the Spanish government pay an expensive 5% interest rate for supposedly risk-free 12-month loans (Belgium too didn't sell the maximum debt on offer).
The risk of a big interest rate spike goes down with each Fed hike.
With Europe in a more stable position and strong demand for credit risk amid the continuing low interest rate environment, inflows are set to continue, driving spreads tighter again, sources suggest.
Well, as I've said many times before, it is because they would rather be sure their money is safe and easy to get their mitts on, than take the risk of obtaining a higher interest rate by lending the cash to other banks.
Take, for example, one indicator of the market's appetite for risk, the spread between swaps of fixed- and floating-rate interest payments (see chart).
"The borrower gets a low interest rate, commensurate with the interest of a conforming loan, and the bank mitigates its risk to some degree, " said Laurie Stewart, the bank's president and CEO.
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