Discuss interest rate risk Solution INTEREST RATE RISK IS THE RISK ARRISES FOR THE BOND OWNERS FROM FLACTUATING INTEREST RATES. HOW MUCH INTEREST RATE RISK A BOND HAS DEPENDS ON HOW SENSETIVE ITS PRICE IS TO INTEREST RATE CHANGES IN THE MARKET. THE SENSITIVITY DPENDS ON TWO THINGS, THE BONDS TIME TO MATURITY, AND COUPON RATE OF BOND. THE DICTIONARY MEANING IS THE PROBABILITY THAT THE MARKET INTEREST RATE WILL RISE SIGNIFICANTLYHIGHER THAN THE INTEREST RATE EARNNED ON INVESTMENTS SUCH AS BONDS, RESULTING IN THEIR LOWER MARKET VALUE. ONE COMMON WAY TO MEASURE INTEREST RATE RISK IS TO CALCULATE ITS DURATION..