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  • Reinvestment risk is one of the risk investor faces when invested in debt market.
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  • It refers to the risk that the coupon or principal amount will have to be reinvested at a lower yield rate prevailing at the time of maturity or when the coupon amount is received.
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  • Reinvestment risk is greatly influenced by market interest rate.
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  • When interest rate falls, investors face higher reinvestment risk.
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Reinvestment Risk & Interest Rate

 

  • Most of time, investors reinvest the coupon or principal amount received, which will be at the current market yields.
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  • The current market yield can be higher, lower or equal to the coupon rate at the time of investment.
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  • In case the current market yield is lower, the coupon proceeds or principal received will be reinvested at lower rate thereby reducing investor return.
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  • This risk of reinvesting at a lower rate is called reinvestment risk.
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Reinvestment Risk

     

  • One way investors can reduce reinvestment risk is by staying invested for a longer duration.
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Impact of Reinvestment Risk explained through example
 

 
Impact of Reinvestment Risk explained through example

 

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