Re-Investment Risk
Re-investment risk is the risk that future proceeds from an investment, such as interest or principal payments, may be reinvested at a lower rate than the original investment. This risk is particularly relevant for fixed-income securities, such as bonds, where investors receive periodic coupon payments or the principal at maturity. If interest rates fall during the investment period, reinvesting these proceeds at lower rates could reduce the overall return on the investment.
Example
An investor holding a 10-year bond with a 5% coupon faces re-investment risk if interest rates drop to 2%, as they would have to reinvest coupon payments at the lower rate.
Key points
• The risk that future proceeds from an investment may be reinvested at lower interest rates.
• Particularly relevant for fixed-income securities like bonds.
• Can reduce overall returns if interest rates decline during the investment period.
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