Reinvestment risk is the risk that cash flows from a fixed-income investment—such as periodic coupon payments or principal repayments—will be reinvested at a lower prevailing rate than the rate implied by the original investment, potentially reducing the realized return.
In fixed‑income analysis, reinvestment risk helps explain why, all else equal, different rate environments can affect realized yields. The risk is higher for securities that pay regular coupons, because more cash flows must be reinvested; zero‑coupon bonds have little reinvestment risk until the final redemption.
For funds or portfolios that distribute cash flows to investors, reinvestment risk is tied to prevailing rates at the time of reinvestment and to the maturity schedule of holdings. It interacts with other rate‑related risks, such as interest rate risk and duration. Portfolio managers may consider cash‑flow patterns and may use strategies like laddering or duration positioning to manage exposure.
A portfolio holding a bond that pays semiannual coupons receives those coupons regularly. If prevailing rates fall after the coupons are received, the reinvested proceeds earn less than the original coupon rate, potentially lowering the realized yield.
A portfolio with a bond that pays semiannual coupons may face reinvestment risk if market rates decline, causing reinvested cash flows to earn less than the bond's coupon rate.
Interest rate risk · Yield to maturity · Duration · Coupon rate · Bond ladder · Callable bonds