In the yesterday post, I wrote how to calculate interest on saving account with new method according to the guidelines of RBI. With this customers of bank will get benefit and bank will suffer loss on 1st April or after 1st April 2010. It means, when a debtor takes loan from creditor, he has to repay his original amount with interest. Interest rates may be changed according to market condition. So, it is the risk for debtor, if he has to pay high amount to creditor due to increasing interest in future. It is also risk for creditor, if he will receive less interest due to decreasing the interest rate in future. This risk will be on all interest bearing financial instruments like bonds, short term credit or other debt.

Interest Rate Risk Management

To solve financial risk problems, we have told you how to manage liquidity risk and solvency risk. Now, you should learn here how to manage interest rate risk.

1. Interest rate risk can be controlled by decreasing the time of payment of debt. It means bonds can be purchased for less time. With this, we can reduce this risk.

2. Debtor or creditor can contract with each other that in future payable interest will fix, changes will no affect this rate.

3. By Using of hedge fund.

4. By measuring interest rate risk, we can make better plan to reduce it. I am also studying the contents of measuring interest rate risk, so you should read Heath-Jarrow-Morton framework for knowing the calculation of this risk.

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