Financial institutions face two major kinds of interest-rate risk.These risks include price risk and reinvestment risk.

Question

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Financial institutions face both price risk and reinvestment risk as two major types of interest-rate risk. Price risk refers to the risk of a decline in the value of a financial instrument due to changes in interest rates, while reinvestment risk refers to the risk that cash flows from an existing investment will have to be reinvested at a lower rate of interest in the future.

Financial Institutions Face Two Major Kinds of Interest-Rate Risk