Interest-On-Interest

DEFINITION of 'Interest-On-Interest'

The interest that is earned upon the re-investment of interest payments. Interest-on-interest is primarily used in the context of coupon paying bonds, where all coupon payments are assumed to be re-invested at some interest rate and held until the bond matures, or when the bond is sold.

BREAKING DOWN 'Interest-On-Interest'

Interest-on-interest is an important consideration an investor must make when analyzing potential investments, as interest-on-interest must be considered when forecasting an investment's total cash return.

For simplification, the interest rate used to calculate interest-on-interest can be the bond's yield at the time the coupon payment is made.

RELATED TERMS
  1. Bunny Bond

    A type of bond that offers investors the option to reinvest coupon ...
  2. Reinvestment Risk

    The risk that future coupons from a bond will not be reinvested ...
  3. Reinvestment Rate

    The amount of interest that can be earned when money is taken ...
  4. Coupon Rate

    The yield paid by a fixed income security. A fixed income security's ...
  5. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  6. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
Related Articles
  1. Markets

    What is Reinvestment Risk?

    Reinvestment risk refers to the risk that a bond’s future coupons will have to be reinvested at a lower interest rate.
  2. Markets

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  3. Markets

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  4. Investing

    What is a "Coupon"?

    In the financial world, “coupon” represents the interest rate on a bond.
  5. Investing

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  6. Markets

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  7. Managing Wealth

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  8. Markets

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  9. Markets

    If I Buy A $1,000 10-Year Bond With A 10% Coupon, Will I Receive $100 Each Year?

    Investors can count on a fixed-income security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesn’t default.
  10. Managing Wealth

    Risks To Consider Before Investing In Bonds

    Make sure you understand the risks associated with bonds before making an investment decision.
RELATED FAQS
  1. How does a bond's coupon rate affect its price?

    Find out how a bond's coupon rate influences its price, including the role of government-dictated interest rates and the ... Read Answer >>
  2. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
  3. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  4. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
  5. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  6. How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center