Reinvestment risk is the risk that the proceeds from the payment of principal and interest, which have to be reinvested at a lower rate than the original investment.
  • Call features affect an investor's reinvestment risk because corporations typically call their bonds in a declining interest rate environment. This allows them to finance their operations at a cheaper rate, but the investor also has to take those proceeds and invest them at lower rates.
  • Amortizing securities have even greater reinvestment risk. Since the investor is receiving both interest and principle payments each month, they have to continue to invest a greater amount of proceeds than with a regular type of bond. Also, the investor is exposed to prepayment risk as rates decline because mortgage and credit card holders can refinance their debt at lower levels.
  • Zero coupon bonds have no reinvestment risk because there are no coupon payments made to the investor. Because of the lower coupon rate, however, zeros expose the investor to a higher interest rate risk.
Because amortizing securities pay part of their principal with regular interest payments, investors receive the maturity value in installments in a current period. Non-amortizing securities make their payment at a later maturity date. If prevailing interest rates are declining, holders of amortizing securities have to reinvest their coupons and portion of principal at a lower rate. Meanwhile, the non-amortizing securities offer the holder some protection by holding the principal payment off until a later date. This enables the non-amortizing holder to maintain a higher rate at a longer period of time and reduces the reinvestment risk for a portion of his or her holdings

Yield Curve Risk

Related Articles
  1. Investing

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  2. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  3. Retirement

    Should Retirees Reinvest Their Dividends?

    Find out why dividend reinvestment may or may not be the right choice for retirees, depending on their financial needs and investment goals.
  4. Retirement

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  5. Investing

    Reinvesting Your Mutual Fund Dividends

    Learn the benefits of reinvesting your mutual fund dividends, their impact over time, and when it is better to take the dividend payments as cash.
  6. Investing

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  7. Investing

    5 Ways to Lose Money With a Dividend Reinvestment Plan

    Enrolling in a dividend reinvestment plan can backfire if you're not using it wisely, costing you money in the process.
  8. Investing

    Risks To Consider Before Investing In Bonds

    Make sure you understand the risks associated with bonds before making an investment decision.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center