> For the complete documentation index, see [llms.txt](https://advisorhub.syntheticfi.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://advisorhub.syntheticfi.com/product-deep-dive/interest-rate-risk-examples.md). # Interest Rate Risk Examples {% hint style="info" %} ## Interest rate risk affects fixed-rate loans If a client locks in a fixed rate and market rates later move down, their loan doesn't adjust. This is the same trade-off as any fixed-rate borrowing. Clients who want flexibility can use the floating-rate option instead. {% endhint %} ### The basic trade-off Every client choosing between fixed and floating is making the same trade-off: * **Fixed rate.** Certainty. The client knows exactly what they'll pay for the life of the loan. The trade-off: if rates move down, they don't benefit. * **Floating rate.** Flexibility. The rate moves with the market, so the client always pays current rates. The trade-off: if rates rise, their cost rises. Neither is safer. It depends on whether the client values predictability or flexibility. ### Example: rates move down after locking in A client takes a 5-year fixed-rate loan. Two years later, market rates have moved down. * **What happens:** Their loan keeps the original fixed rate. It doesn't adjust. * **How they feel:** They may regret locking in, since a new loan today would be cheaper. * **What they can do:** They can pay down or exit early, but the cost of doing so depends on the rate difference. Exiting a fixed-rate loan after rates have moved down is more expensive than exiting when rates are flat. Prepaying a fixed-rate loan when rates have moved down usually offers no benefit: the cost to exit roughly equals the gain from the lower rate, so it nets out to little more than trading fees. ### Example: rates rise after locking in Same client, same 5-year fixed loan. Two years later, market rates have risen. * **What happens:** Their loan keeps the original, now-below-market rate. * **How they feel:** They locked in at a good time. Their financing is cheaper than anything available now. * **The point:** Fixed-rate risk cuts both ways. The client who loses when rates move down is the same client who wins when rates rise. ### Example: floating rate through a rate cycle A client uses the floating-rate option instead. * **When rates move down:** Their cost falls with the market. They benefit automatically. * **When rates rise:** Their cost rises. There's no protection from an increase. * **The point:** Floating removes lock-in regret, but adds exposure to rate increases. ### How to think about the decision * **Use floating if the client values flexibility.** It rolls regularly and always reflects current market rates, so there's no lock-in regret. * **A longer fixed term suits clients who value long-term stability**, especially for long-term liabilities like a mortgage. It can also work in the client's favor when the portfolio is expected to return more than the loan costs, though returns are uncertain and can fall below the cost of the loan.\* The right term depends on the client's objective and risk tolerance, not on guessing where rates will go. * **Match the structure to the client's needs.** Some clients want the certainty of a fixed rate, others the flexibility of floating. Clients who want a structured paydown, more like a mortgage, can ask about the ladder product. Reach out to your SyntheticFi contact to discuss more advanced scenarios. ### How to talk about it with a client > "You're really weighing flexibility against certainty. Fixed locks in your rate, so you know exactly what you'll pay, but if rates drop later you won't get that benefit. Floating moves with the market, so you always get current rates, but your cost can go up. There's no wrong answer, it comes down to your objective and risk tolerance." *** [\* Important Disclosures](/disclosures.md) --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. 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