Reinvestment risk

Reinvestment risk

 The possibility that an investment’s return may be lower than expected because interest rates could decline in the future is known as reinvestment rate risk. Callable bonds and other fixed-income instruments are particularly vulnerable to this kind of risk. Additionally, the reinvestment rate risk is often larger for shorter-term bonds than longer-term ones. To lessen the impact of reinvestment rate risk, investors should steer clear of bonds with callable features and choose bond maturities that align with their time horizon. The best way to learn about the danger of reinvestment rates is to see a financial counselor. 

What is Reinvestment Risk? 

An investor faces reinvestment risk if there’s a chance they won’t be able to reinvest their cash flows (such as coupon payments) at the same pace as their present return. Due to the absence of coupon payments, zero-coupon bonds are unique among fixed-income securities in that they pose no investment risk. 

While bond investments represent the most reinvestment risk, investors are vulnerable to this type of risk with any investment that generates cash flow. 

Understanding Reinvestment risk 

There is a chance that the investment’s cash flows may yield less in new security, which means there will be a loss of opportunity cost. This is called reinvestment risk. The risk is that an investor would not be able to reinvest their profits at a rate that is competitive with their existing rate of return. 

An investor purchases a $100,000 T-note with a 6% interest rate, for instance, for a period of ten years. The security is expected to generate an annual income of $6,000 for the investor. But interest rates drop to 4% by the year’s conclusion. 

The investor would get $240 instead of $360 each year if they used the $6,000 to purchase another bond. On top of that, investors risk losing some of the principal if interest rates go up and they sell the note before it matures. The danger of reinvestment is particularly high for callable bonds. This is because a common practice is to redeem callable bonds as interest rates start to decline. Bondholders get their principal back when they redeem their bonds, while issuers get access to cheaper borrowing rates. A reduced interest rate will be offered to investors who are ready to reinvest. 

Types of Reinvestment Risk

Callable bond reinvestment risk 

The issuing business has the option to redeem a callable bond before its maturity date. To make up for the fact that they can be called at any moment, callable bonds have hefty coupons. In the case of dropping rates, bond issuers are quick to take advantage of debt refinancing opportunities, putting investors in a precarious position since they must decide whether to reinvest the proceeds at lower rates or not. 

Reinvestment Risk in Redeemable Preferred Stock 

One type of stock is redeemable preferred stock, which allows the issuer to repurchase the shares at a certain price. It may not be the best move for the investor to reinvest the funds after redemption in the hopes of a strong return, especially if interest rates have dropped. 

Reinvestment Risk in Zero-Coupon Bonds 

In zero-coupon bonds, this is not as noticeable as in the previous examples. Investors will only have to worry about reinvesting the maturity amount if coupon income is not available. 

Importance of Reinvestment Risk 

Analyzing the Potential Impact of Reinvestment on Total Portfolio Risk 

When calculating the total portfolio risk and developing effective risk management methods, investors must take reinvestment risk into account with other investment risks including interest rate risk, credit risk, and market risk. 

Investment Plans That Account for Both Risk Tolerance and Long-Term Financial Objectives 

To maintain a balanced approach to risk management, investors should be aware of the possible effects of reinvestment risk on their investment portfolios and adjust their investing strategies accordingly. 

Portfolio Evaluation and Modification regularly 

To mitigate the risk of reinvestment, investors should monitor their portfolios on a regular basis for changes in market circumstances, interest rates, and their financial objectives. 

Examples of Reinvestment risk 

Imagine a buyer of a 10-year semi-annual bond who agreed to receive a coupon equal to 4.0% of the principal amount each year. The investor will get 2.0% interest every six months due to the security’s semi-annual bond status. 

  • Ten Years Means Maturity 
  • Rate of Interest Per Annum = 4.0 
  • Yield on Semi-Annual Loans at 2.0% 

Assume for the sake of argument that market interest rates decline by 2.0% from the original issue date during the next five years. 

Reinvestment risk is demonstrated when an investor is only able to reinvest coupon payments at the current 2.0% rather than the initial 4.0% due to a decrease in the market’s prevailing interest rate. 

In this hypothetical scenario, the principal is subject to both the reinvestment rate and the coupon payments, assuming that the market interest rate stays at 2.0% until maturity. 


Assuming that all future cash flows are reinvested or the projected rate of return, one may calculate the bond price as the present value of all future cash flows. Our financial situation is affected by even a small shift in market rates, which affects that computation. You may lessen your exposure to risk by building a bond portfolio with care and study. Nevertheless, it is not feasible to eradicate all traces. 

Frequently Asked Questions

Reinvestment risk is the possibility that reinvesting a company’s cash flows into a new venture can result in a lower return. It is a particular threat to callable bonds because they are usually redeemed when interest rates fall. 

Employing bond ladders, actively managed bond funds, zero-coupon instruments, long-term securities, and non-callable bonds are ways to lessen reinvestment risk’s impact. 

Interest rate risk refers to the potential impact of fluctuating interest rates on bond prices, whereas reinvestment risk is mainly concerned with the influence on future cash flows and the return on reinvested money. 

While bond investments represent the most reinvestment risk, investors are vulnerable to this type of risk with any investment that generates cash flow. 

The possibility that reinvesting a company’s cash flows into a new venture can result in a lower return is known as reinvestment risk. Reinvestment risk is a particular threat to callable bonds because they are usually redeemed when interest rates fall. 

    Read the Latest Market Journal

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 405 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 68 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 150 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 84 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 109 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 191 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 98 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 137 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066