Interest rate risk

Interest rate risk refers to the risk that an investment's value will decrease due to a change in interest rates. To understand this concept using the NCAA tournament as an analogy, let's imagine that you are a college basketball team that is considering betting on yourself to win the tournament. If you place a bet on yourself to win the tournament, the potential payout will depend on the odds set by the bookmakers. These odds are influenced by a number of factors, including your team's past performance, your players' skills and experience, and the quality of your opponents.

Now, let's imagine that the odds change before the tournament begins due to various factors, such as injuries to key players or unexpected upsets in other games. If the odds become less favorable for your team, the potential payout for your bet will decrease. This is similar to how a decrease in interest rates can cause the value of an investment to decrease. Conversely, if the odds become more favorable for your team, the potential payout for your bet will increase. This is similar to how an increase in interest rates can cause the value of an investment to increase. Overall, just like how the NCAA tournament can be unpredictable and subject to various factors that can influence the outcome, interest rate risk is a complex and dynamic concept that is influenced by a variety of economic and market factors.