Interest rate risk is the exposure of a corporation’s financial condition to adverse movements in interest rates. Firms that rely heavily on variable-rate debt face rising interest expenses when rates climb, while firms holding fixed-rate financial assets suffer capitalization losses as market yields rise.

Treasury teams group interest-bearing assets and liabilities into specific time-horizon buckets based on when they reprice.
\(\text{Interest\ Rate\ Gap}=\text{Rate-Sensitive\ Assets\ (RSA)}-\text{Rate-Sensitive\ Liabilities\ (RSL)}\)

Simplified formula (plain Unicode):
Interest Rate Gap = RSA − RSL

Where:

• RSA = Rate-Sensitive Assets
• RSL = Rate-Sensitive Liabilities

Impact: If a firm features a negative gap (RSL > RSA), an increase in market interest rates will cause interest expenses to rise faster than interest income, compressing net profit margins.

Duration measures the weighted average timing of a financial instrument’s contractual cash flows. Modified Duration quantifies the exact percentage sensitivity of a bond or debt instrument’s market value relative to a 100-basis-point yield movement:

Plain Unicode version (simplified):
ΔValue% ≈ −MD × Δy

Meaning in words:

• ΔValue% = approximate percentage change in the bond’s/loan’s value.
• MD (Modified Duration) = how sensitive that value is to interest-rate moves.
• Δy = the change in yield (interest rates).
• The minus sign shows the inverse relationship: when yields go up, bond prices/value go down (and vice versa).

Corporate treasurers must strategically structure their corporate debt portfolios based on macroeconomic cycles. During periods of historical interest rate lows, treasurers seek to lock in long-term Fixed-Rate Debt to protect future cash flows. Conversely, during peak inflation cycles when interest rate cuts are anticipated, firms may utilize short-term Floating-Rate Debt to automatically capture future reductions in borrowing costs.