Interest rate risk refers to the potential for investment losses due to changes in interest rates. When interest rates rise, the value of existing bonds typically falls, as new bonds are issued at higher rates, making older bonds less attractive. This risk affects various financial instruments, including bonds, loans, and mortgages. Investors and financial institutions must manage interest rate risk to protect their portfolios. Strategies may include diversifying investments, using interest rate swaps, or adjusting the duration of their bond holdings. Understanding this risk is crucial for making informed financial decisions and maintaining stability in investment returns.