Which party bears interest-rate risk exposure in a fixed rate loan? in a floating rate loan?
To the extent that risk means future uncertainty, both parties bear risk when interest rates are floating that they do not bear when rates are fixed. However, most lenders and borrowers are primarily concerned with the possibility that interest rates will move against them. Accordingly, the risk depends on the direction in which rates might move. In a fixed rate loan, the risk comes from not being able to benefit from a change in rates. The lender bears the risk that interest rates will rise, and it will be unable to increase the rate it is charging; the borrower bears the risk that rates will fall, and it will be unable to reduce the rate it is paying. In a floating rate loan, the risk comes from being hurt by a change in rates. The lender bears the risk that interest rates will fall, and so will its earnings; the borrower bears the risk that rates will rise, and so will the amount it is paying in interest.