What does interest rate risk refer to in personal finance?

Interest rate risk in personal finance primarily refers to the possibility of investment losses resulting from fluctuations in interest rates. When interest rates rise, the value of fixed-rate investments like bonds tends to decrease. This is because new bonds are issued at the higher current rates, making the older bonds with lower rates less attractive. Consequently, if you hold these older bonds or similar investments, their market value can drop, leading to potential losses if you need to sell them before maturity.

While the other options touch upon aspects of interest rates, they don’t encapsulate the full essence of interest rate risk as it pertains to personal finance. The potential for investment gains due to interest rate changes is more about the opportunity side rather than the risks involved. The impact of interest rates on savings accounts and the effect of interest rates on mortgage rates are specific situations influenced by interest rate changes but do not comprehensively describe the risk associated with the volatility of those rates in the broader investment context.