Changes in interest rates - and in expected future interest rates - can cause the prices of some investments to rise or fall suddenly.

When interest rates climb, for example, bond prices fall in lockstep. The reverse is also true: Falling rates mean higher prices for bonds.

The prices of all types of investments reflect expectations about the future course of interest rates and so, to some extent, are subject to interest rate risk. But the average investor is most likely to encounter interest rate risk in the bond market.

If you buy a long-term bond and interest rates rise, your investment will drop in value. Should rates fall on the other hand, you can expect to enjoy a profit as the investment gains value. That's because you're guaranteed a rate higher than the prevailing market is offering, increasing your "spread" or profit.

These price fluctuations can be dramatic. For example, if long-term rates double from 7 percent to 14 percent, the value of your bond will be cut roughly in half. You can sell it and invest in a higher-yielding security. Or you can hold on to it, collecting 7 percent on your investment at a time when the market rate is 14 percent.

To reduce your exposure to interest rate risk, pick a short-term bond. They're hurt less by rising rates than long-term bonds. But if you believe rates are heading down and you want to bet on bonds, you would buy the longest-term bond available.

If you believe interest rates are heading down and you want to speculate or bet on bonds, remember that the longer the term, the more the bond will respond to a change in interest rates. So a 30-year bond is a better choice than a five-year bond. Best - and most volatile - of all is a zero-coupon bond.

Zero-coupon Treasury bonds have been around since 1981. Unlike regular Treasury bonds, which provide semiannual interest payments or coupons, zeros pay no coupon or interest. Instead, they're offered at a deep discount and appreciate to face value at maturity.

They were initially pitched as a way to target a particular time when an investor would need money for, say, college tuition. But speculators use them to make bets. Because there is no interest payment to cushion it, a zero is much more volatile than a coupon bond. If interest rates fall, it will appreciate much more than a regular bond.