
312 INTERNATIONAL FINANCIAL MANAGEMENT
Thus, the debt holder faces a risk called the interest rate risk, which refers to uncertainty over
the price of a debt security. For example, when interest rates fall, the price of a debt secu-
rity rises; when interest rates rise, the price of a debt security falls. Different debt securities
respond differently to the changes in the interest rates. The sensitivity of the price of a debt
security to interest rates depends largely on the maturity of the debt security. The longer to
maturity of the debt security, the higher is the sensitivity of its price to interest rates.
All the investors, whether they are ...