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 ?
Best expects investment income declines as a result of the less favourable reinvestment rates in the current environment and for the foreseeable future.
As reinvestment rates continue to depress book yields, companies may be further pursuing the limits of duration, credit, and liquidity.
This charge included CAD 97 million resulting from the company s quarterly update to fixed income ultimate reinvestment rates used in the valuation of policy liabilities.
He cites this as his biggest concern, and notes that while after-tax returns have not been impacted much due to better municipal returns and the purchase of a "fair-sized portfolio of high-quality, dividend-paying common stocks, the fact is, our yield has come down by probably 40 basis points or so, and is probably going to come down by another 15 or 20 points by the end of the year, because cash flow is coming in and reinvestment rates are not as attractive.
Reasons include: Poor returns on deposits - Those earning a good rate due to a historic fixed rate bonds will be seeing these come to maturity and reinvestment rates will tend currently to be poorer.
Overall rates of return: investment base, reinvestment rates, and time horizon, The Engineering Economist 39(2): 139-163.
Over the long term, because of competition, economic returns tend to fade toward the cost of capital, and reinvestment rates tend to fade to slower rates as firms mature.
A significant portion of the servicer's compensation is the interest earnings off float, which is a function of short-term reinvestment rates.
While yield to call can look attractive under certain circumstances, buyers should take into consideration the lower reinvestment rates that will be offered for subsequent investments and should calculate an overall horizon return.
In addition, Bogle explains the importance of duration and reinvestment rates to bondholders.
Critical challenges will be faced with lower interest and reinvestment rates, more conservative investment policies and higher taxes," Wander said.
As discussed in AFG's SEC filings, adverse changes in reinvestment rates or modifications to actuarial assumptions in our annuity and run-off long-term care businesses could result in material charges to earnings.