Which category of risk includes interest rate risk?

Interest rate risk falls under market risk because it pertains to the potential impact of changes in interest rates on the value of financial instruments. Market risk encompasses various factors that can affect the entire market or a particular sector, including equity risk, currency risk, and indeed, interest rate risk.

Interest rate risk is significant for borrowers and investors, as fluctuations in interest rates can affect the cost of borrowing and the returns on investments. For instance, when interest rates rise, the value of existing bonds typically falls, thus exposing investors to potential losses. This characteristic aligns directly with market risk, which relates to the uncertainty and variability in the financial markets.

In contrast, credit risk pertains to the likelihood that a borrower will default on their obligations, while sovereign risk is associated with the potential for a government to default on its debt. Liquidity risk relates to the ease with which an asset can be converted into cash without significantly affecting its price. None of these other categories encompass the effects of interest rate changes on market instruments like bonds and interest-sensitive assets.