Reinvestment Risk

Reinvestment risk refers to the risk that an investor will not be able to reinvest the proceeds from an investment, such as interest or dividends, at the same rate of return as the original investment. This is particularly relevant for fixed-income securities, where declining interest rates can force investors to accept lower returns when reinvesting coupon payments or the principal at maturity. Reinvestment risk can reduce the overall return on an investment, especially in a falling interest rate environment.

Example

An investor holding a 5% bond faces reinvestment risk if interest rates fall to 3%, as they would have to reinvest coupon payments at the lower rate, reducing overall returns.