What factor is typically assessed to determine interest rate risk?

The assessment of fluctuations in bond prices is a key indicator for determining interest rate risk. Interest rate risk refers to the potential for investment losses that result from a change in interest rates. When interest rates rise, bond prices typically fall, and vice versa. This inverse relationship is fundamental to understanding how interest rate movements impact fixed-income securities.

Investors closely monitor bond price fluctuations because they provide insights into market expectations regarding future interest rate changes. For instance, if bond prices are declining, it may indicate that investors expect interest rates to rise, which poses a risk for those holding fixed-income investments. Therefore, assessing fluctuations in bond prices is crucial for evaluating overall interest rate risk exposure in a portfolio.

In contrast, while the stability of currency exchange rates, the health of the broader economy, and the performance of equity markets can also influence financial markets, they are not direct measures of interest rate risk. These factors may interact with interest rate movements but do not specifically quantify the risk associated with changes in interest rates as bond price fluctuations do.