Definition
Reinvestment risk is the possibility that coupon payments or principal repayments will need to be reinvested at lower interest rates than the original investment. This is particularly relevant for callable bonds and in falling rate environments. Zero-coupon bonds eliminate reinvestment risk.
Example
You receive $1,000 from a maturing 5% bond but can only reinvest at 3% due to fallen rates, reducing future income.
FAQ
What is Reinvestment Risk?
The risk that future cash flows will be reinvested at lower rates.
Why is Reinvestment Risk important?
Reinvestment Risk helps investors evaluate fixed income and make more informed decisions.