Reinvestment Risk
The risk that coupons or maturing principal must be reinvested at rates lower than the original investment earned.
Formula
Test: the realised return falls below the original yield to maturity because intermediate cash flows were reinvested at lower rates
Unit
%
In depth
Yield to maturity assumes every coupon is reinvested at the same yield, an assumption that fails whenever rates change — which is always. Reinvestment risk therefore works opposite to price risk: falling rates raise a bond's price and lower its reinvestment return, while rising rates do the reverse. Duration matching exploits this offset, immunising a portfolio against rate moves by balancing the two effects. Zero-coupon bonds eliminate reinvestment risk entirely, since there is nothing to reinvest, which is why they are used to fund known future liabilities.
Worked example
An 8% bond quoted at a 9.23% yield to maturity, whose coupons are reinvested at 6% instead, delivers a realised return meaningfully below 9.23%. The quoted yield was never a promise about the coupons' fate.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Reinvestment Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.