Rollover Risk

Rollover risk is the risk that the interest rate on a floating-rate investment will increase after the investment is rolled over into a new term. This can occur when the Federal Reserve raises interest rates, or when the market for floating-rate investments becomes more competitive.

Rollover risk can be a significant problem for investors who are holding floating-rate investments with short maturities. For example, if an investor holds a one-year floating-rate bond with an interest rate of 3%, and the Federal Reserve raises interest rates to 4%, the investor will lose money on the investment when it is rolled over into a new term.

Rollover risk can be managed by investing in floating-rate investments with longer maturities. This will reduce the frequency with which the investment is rolled over, and will therefore reduce the risk of an interest rate increase.

Rollover risk can also be managed by using derivatives to hedge the interest rate risk. For example, an investor could buy an interest rate swap that locks in the interest rate on the investment. This would protect the investor from an interest rate increase.

Rollover risk is an important consideration for investors who are considering investing in floating-rate investments. By understanding the risks involved, investors can make informed decisions about how to manage their portfolios.