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Reinvestment risk

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Title: Reinvestment risk  
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Subject: Bond (finance), Dedicated portfolio theory, United States Treasury security, Collateralized mortgage obligation, Finance
Collection: Finance
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Reinvestment risk


Reinvestment risk is one of the main genres of financial risk. The term describes the risk that a particular investment might be canceled or stopped somehow, that one may have to find a new place to invest that money with the risk being that there might not be a similarly attractive investment available. This primarily occurs if bonds (which are portions of loans to entities) are paid back earlier than expected.

Consequences

The risk resulting from the fact that interest or dividends earned from an investment may not be able to be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. For example, falling interest rates may prevent bond coupon payments from earning the same rate of return as the original bond. Pension funds are also subject to reinvestment risk especially with the short-term nature of cash investments there is always the risk that future proceeds will have to be reinvested at a lower interest rate.

See also

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