Reinvestment Risk

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DEFINITION

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. Reinvestment risk is more likely when interest rates are declining. Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.

INVESTOPEDIA EXPLAINS

Two factors that have a bearing on the degree of reinvestment risk are:


Maturity of the bond - The longer the maturity of the bond, the higher the likelihood that interest rates will be lower than they were at the time of the bond purchase.


Interest rate on the bond - The higher the interest rate, the bigger the coupon payments that have to be reinvested, and consequently the reinvestment risk.




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