Reinvestment risk


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Reinvestment risk

The risk that proceeds received in the future may have to be reinvested at a lower potential interest rate.

Reinvestment Risk

A risk that an investment, usually a bond, will be paid off early and that the money earned may not be able to be reinvested in a security with a comparable return. Suppose one invested in a bond with coupon payment of 4%. However, the issuer calls the bond and pays the par value. The investor has made a profit, but interest rates have fallen and now he/she may only purchase a bond with coupons of 2.5%. Theoretically, one might purchase a mortgage-backed security or other investment in which all the mortgage holders backing the MBS may pay back their mortgages early, exposing one to reinvestment risk. However, in reality, this risk exists primarily in callable bonds and certificates of deposit.

reinvestment risk

The possibility that the cash flows produced by an investment will have to be reinvested at a reduced rate of return. For example, the owner of a certificate of deposit faces the risk that lower interest rates will be in effect when the certificate matures and the funds are to be reinvested.

Reinvestment risk.

Reinvestment risk occurs when you have money from a maturing fixed-income investment, such as a certificate of deposit (CD) or a bond, and want to make a new investment of the same type.

The risk is that you will not be able to find the same rate of return on your new investment as you were realizing on the old one. In fact, the return could be significantly lower, based on what's happening in the economy at large, though it could also be higher.

For example, if a bond paying 6% interest matures when the current rate is 4%, you must settle for a lower return if you buy a new bond unless you're willing to buy one of lower quality.

One way to limit reinvestment risk is by using an investment technique known as laddering, which means splitting your investment among a number of bonds or CDs that mature gradually over a series of years.

That way only part of your total investment will mature and have to be reinvested at any one time.

References in periodicals archive ?
Each asset class and different assets within one class, has its own peculiar growth cycle, income pattern and life cycle; they also have their own unique risks like market risk, concentration risk, liquidity risk, currency risk, reinvestment risk and inflation risks.
that reinvestment risk is not an immediate concern."
Fitch believes that even if there is reinvestment risk (asset-liabilities mismatch), it should not constitute a significant threat to the company's solvency.
Shifting lock-stock-and-barrel to extremely short-tenor bonds due to their lower sensitivity to interest rates may not be the optimal decision, because such a move will expose the allocation to the so-called reinvestment risk -- the risk of having to invest the proceeds of a maturing bond into debt instruments offering lower yields as the economy eventually slows down.
Design of call provisions allows the firm to mitigate the agency conflict due to the investor's reinvestment risk (call due to declining interest rates (Kish and Livingston 1992)), ratings-upgrade risk (call due to credit ratings improvement in high-risk firms (Diamond 1991)), and growth-options risk (call due to realization of growth options in low-risk firms (Bodie and Taggart 1978)).
However, the long-term nature of these products exposes the insurer to reinvestment risk and longevity risk.
Investors have the option to either invest the proceeds from RQD into a subsequent maturity of an RBC Target Maturity Corporate Bond ETF or to utilize the proceeds in a ladder strategy to help manage interest rate and reinvestment risk.
The company also noted that this approach to cash deployment significantly reduces the reinvestment risk typically associated with purchasing deposits.
"Depending on the type and duration of the insurer's liabilities, this reinvestment risk can be detrimental to the financial performance of the company."
- While lower PIB duration implies a greater reinvestment risk come 2016 overall PIBs relative to investments at 62% is one of the highest amongst peers and is likely to boost NIM in 2015.
They have no worries because there is no reinvestment risk or any risk of the government going bankrupt (as it can always print more money).
With increasing longevity, reinvestment risk increases further, thereby making it more challenging to price annuities."