reinvestment rate

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Reinvestment rate

The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security.

Reinvestment Rate

The coupons that a bondholder uses to buy more of the same bond as a percentage of total coupons received. The reinvestment rate tends to increase when interest rates rise because the bondholder will earn more interest with less risk. See also: Reinvestment Effect, Plowback Rate.

reinvestment rate

The annual yield at which cash flows from an investment can be reinvested. The reinvestment rate is of particular interest to people holding short-term investments, such as certificates of deposit or Treasury bills, or long-term investments that produce large annual cash flows, such as high-coupon bonds.

reinvestment rate

When analyzing the value of an income-producing property,it is the rate an investor is assumed to be able to earn on intermediate cash flows. The number is necessary for inclusion in the formula for the financial management rate of return.

Example: Ryan owns two rental houses. After payment of all expenses and debt service, Ryan has cash flows of $300 per month, which is a 15 percent return on his money. The internal rate- of-return analysis for these properties assumes that Ryan will take his entire $300 per month and reinvest that money in something else at the same 15 percent rate he is earning on the apartments. The formula assumes a reinvestment rate of 15 percent, which is highly unlikely. The financial management rate-of-return formula still assumes Ryan will reinvest the entire $300 per month, but allows the person doing the analysis to pick a reinvestment rate. If Ryan puts the $300 per month in a savings account earning 2.5 percent, then his reinvestment rate is 2.5 percent.

References in periodicals archive ?
Automobile rate increases are expected to outpace higher liability loss-cost trends and help offset low re-investment rates, alleviating operating-margin pressure.
Its research note said: "Even at current high price levels, re-investment rates appear to be falling, not rising, pushing [oil] industry cash reserves near $500 billion".
The returns on federal funds sold, interest bearing balances with banks, and the overall investment portfolio were also negatively impacted by the lower rate environment as re-investment rates have fallen considerably year-over-year.