reinvestment rate

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 ?
The 50 percent reinvestment rate is derived by dividing the target growth rate of 9.
HBL IMMF is exposed to reinvestment rate risk, which has heightened lately on account of the trend in policy rate.
The bank's improved capital position reflects its high reinvestment rate of 88.
We lead the nation in patents per capita and 5 percent of our local economy is plowed right back into R&D, the highest reinvestment rate anywhere in the world.
Now, Berkley says in a conference call with investors, his top-two concerns are the reinvestment rate on the company's portfolio and the risk of inflation.
However, NPV is unable to reflect the reality of construction market when the limitation on the use of free cashflow leads to violation of NPV's assumption that firm's opportunity cost is the same as reinvestment rate (Beaves 1988).
The alternative reinvestment rate is the after-tax rate at which money can be safely invested.
Because of the certainty of the reinvestment rate, investors can better predict and plan for specific accumulated values at the maturity date.
It eliminates multiple IRR rates, addresses the reinvestment rate issue, reduces overoptimism and produces a result that, when ranking projects, is consistent with the NPV rule.
Because the new figure of $55,247 is above the bracket amount, it will be compounded at the reinvestment rate ([i.
The required portfolio adjustment process will be one of taking more risk to offset the previously unforeseen reinvestment rate risks that have eroded income.
The higher the coupon rate and the longer the period of time until maturity, the greater the impact of changes in the reinvestment rate on both future value and yield.