Interest rate risk refers to the possibility that borrowing costs will rise after a municipality has committed to a project or financial plan. When interest rates increase, cities and towns face higher payments on variable-rate loans or when refinancing existing debt. This risk affects long-term infrastructure projects that span many years. Municipal finance departments manage this risk through strategies like locking in fixed rates, diversifying debt maturities, and maintaining reserve funds. Understanding interest rate risk helps municipalities plan budgets that can withstand economic changes and protect taxpayers from unexpected cost increases.