How is interest rate risk defined?

Interest rate risk is defined as the risk that bond values will fall due to rising rates. When interest rates increase, newly issued bonds tend to offer higher yields, making existing bonds with lower yields less attractive. As a result, the market value of existing bonds declines, leading to potential losses for investors who may need to sell before maturity or when they choose to redeem their bonds. This risk is particularly significant for fixed-income investments, as their returns are highly sensitive to fluctuations in interest rates, impacting both their prices and the broader bond market.

In contrast, the other options address different forms of financial risk. The risk of loan defaults increasing pertains more to credit risk, which deals with the possibility of borrowers failing to meet their financial obligations. Currency fluctuations relate to foreign exchange risk, which affects investments in international markets and can impact returns based on changes in currency value. Finally, the risk from failing investments is a general statement that could encompass various types of risk but does not specifically define interest rate risk. Thus, option B accurately captures the essence of how interest rate changes impact bond values.