Interest Rate Risk Sensitivity: Measuring Your Exposure

Interest rate risk is one of the most common blind spots in wealth management. A move in rates simultaneously hits the cost of credit, the value of some investments, and saving capacity. This tool quantifies the most underestimated leg — and the only one that follows a simple formula: the impact on a bond portfolio. The rule fits in one line: value change ≈ −duration × rate change. That is what made long bond funds fall 15 to 20% in 2022.

First-order sensitivity (modified duration), a linear approximation. The tool does not predict rate moves: it measures a structural vulnerability under a given change. Neither advice nor a personalized recommendation.

Duration: the measure of exposure

Duration expresses, in years, a bond’s sensitivity to a rate move. Its practical reading is direct: for a rate change of Δ points, value moves by about −duration × Δ (in %). A fund with a duration of 7 loses ≈ 7% if rates rise one point; a long fund with a duration of 10 loses ≈ 20% for +2 points. The relationship is symmetric: a rate fall produces the mirror gain — which is also why long bonds rally hard when rates recede.

Why “bonds” doesn’t mean “risk-free”

The idea that a bond fund is a “quiet” investment is the blind spot. As long as rates hold still, the holder collects the coupon smoothly. But a regime shift — like 2022, when rates went from near-zero to several points in a few quarters — hits market value in proportion to duration. The longer the portfolio’s average maturity, the more violent the shock. The simulator’s chart shows it: the slope of your duration, against a short duration, is your exposure.

The two other legs: credit and saving capacity

Rate risk does not stop at bonds. A rise makes a variable-rate loan more expensive (a recurring charge, in euros per year) and can compress saving capacity. These effects are in different units from a capital impact, and the tool does not aggregate them — to avoid mixing a one-off shock with an annual flow. For the credit leg, the repay-or-invest simulator and the financial resilience simulator show the effect of a heavier payment on the budget.

Limits of the measure

The estimate is a first-order approximation: it linearizes the price–rate relationship. Convexity, ignored here, slightly cushions losses and amplifies gains for large moves — the gap stays small at common magnitudes. The tool assumes a uniform shock across the yield curve and accounts for neither credit risk (spread) nor coupon reinvestment. It links nominal rates and purchasing power via the real return after inflation simulator.

Frequently asked questions

What is duration?

It is a bond’s (or fund’s) sensitivity to a rate move, expressed in years. A duration of 7 means a one-point rate rise costs about 7% of value. Money-market or euro funds have a very low duration; long government bond funds, a high one.

Why does a bond lose value when rates rise?

Because newly issued bonds offer a higher coupon. To stay competitive, the price of older, lower-coupon bonds must fall until their yield matches the market. The further the maturity, the larger this price adjustment — that is duration.

Is a rate rise always bad news?

Not for everyone. It weighs on the market value of bonds held and on the cost of variable-rate loans, but it raises the yield on new investments and on regulated savings. The net effect depends on a balance sheet’s structure — long assets against liabilities and cash.

How can you reduce interest rate risk?

Descriptively, a shorter duration reduces the value’s sensitivity to rate moves — usually at the cost of a lower expected return. It is a structural trade-off, not a recommendation: the tool helps visualize it, not decide it.

How much a rate shock hits a bond depends on the current monetary stance — tightening, pause, or easing don’t carry the same risk. See where the cycle stands: current macro regime →

Key takeaways

• Impact of a rate move on a bond portfolio ≈ −duration × rate change.
• “Bonds” does not mean “risk-free”: duration measures the exposure.
• The relationship is symmetric: a rate fall produces the mirror gain.
• The tool quantifies the bond leg; the cost of credit and saving capacity are read elsewhere.

Last updated — 28 May 2026