What type of risk is associated with interest rate fluctuations?

Interest rate risk refers specifically to the potential for investment losses due to changes in interest rates. When interest rates rise, the value of fixed-income securities, such as bonds, typically falls. This inverse relationship is critical for investors to understand, as fluctuations in interest rates can significantly impact the performance of various asset classes.

In contrast, credit risk pertains to the possibility that a borrower may default on their obligations, market risk involves the overall risk of loss in the financial markets, and liquidity risk relates to the difficulty of selling an asset without incurring a loss. These types of risks are influenced by factors other than interest rate changes, highlighting how interest rate risk specifically addresses the impact of interest rate movements on financial instruments. Thus, identifying interest rate risk as the correct answer emphasizes the importance of recognizing how interest rate changes can directly affect investment valuations.