Reinvestment risk

Reinvestment risk,

Definition of Reinvestment risk:

  1. Reinvestment risk refers to the possibility that an investor will be unable to reinvest cash flows (e.g., coupon payments) at a rate comparable to their current rate of return. Zero-coupon bonds are the only fixed-income security to have no investment risk since they issue no coupon payments.

  2. Reinvestment risk is the likelihood that an investment's cash flows will earn less in a new security. For example, an investor buys a 10-year $100,000 Treasury note with an interest rate of 6%. The investor expects to earn $6,000 per year from the security.

  3. Probability of loss where a bank may have to make new loans from the maturing loans at a lower rate of interest.

  4. The action of putting the profit made on a previous investment back into the same scheme.

How to use Reinvestment risk in a sentence?

  1. Methods to mitigate reinvestment risk include the use of non-callable bonds, zero-coupon instruments, long-term securities, bond ladders, and actively managed bond funds.
  2. Future reinvestment in new technologies.
  3. Reinvestment risk is the likelihood that an investment's cash flows will earn less in a new security.
  4. Callable bonds are especially vulnerable to reinvestment risk because the bonds are typically redeemed when interest rates decline.

Meaning of Reinvestment risk & Reinvestment risk Definition