# reinvestment risk and interest rate risk

13. Remember the cardinal rule of bonds: When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. When reinvesting proceeds from investments, it is beneficial to have a higher interest rate, as the investor will then obtain higher returns. Interest rate risk is the risk that changes in interest rates (in the U.S. or other world markets) may reduce (or increase) the market value of a bond you hold. In reinvestment rate risk, the concern isn't price, but rather the ability to reinvest the money received from a bond at the same rate. Reinvestment Risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested is called reinvestment risk. Unexpected bond price changes will occur if market interest rates changes unexpectedly. Any mismatches in cash flows would expose the banks to variations in NII as the market interest rates move in different directions. Investment Horizon, Macaulay Duration, and Interest Rate Risk The investment horizon is essential in measuring the interest rate risk of a fixed-rate bond. #1 – Duration Risk – It refers to the risk arising from the probability of unwilling pre-payment or extension of the investment beyond the pre-determined time period. Making an investment in bonds carries two kinds of risk: interest rate risk and credit risk. The interest-rate risk of a bond is A. the risk related to the possibility of bankruptcy of the bond's issuer. #2 – Basis Risk – It refers to the risk of not experiencing the exact opposite behavior to interest rate changes in the securities with inverse features. Interest rate risk applies price action: the price of the investment is higher at the end of the period than at the beginning of the period because interest rates fell between 2010 and 2020: a share of the mutual fund cost $10.72 in 2010 and $11.64 in 2020. Reinvestment risk arises when reinvesting the income received from securities. Reinvestment risk is the risk that an investor will be unable to reinvest a bond’s cash flows (coupon payments) at a rate equal to the investment’s required rate of return. B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. Interest rate risk and reinvestment risk in bond investment Reinvestment Rate Risk. considered risk.) Interest Rate Risk. C. the unsystematic risk caused by factors unique in the bond. reinvestment risk is the risk that a bond's future coupon payments may have to be reinvested at a lower rate than the bond's yield to maturity interest rate that is adjusted for actual changes in price level is When there is a parallel shift to the yield curve, the yield-to-maturity and coupon reinvestment rates are assumed to change by … 2. These two influences can have very distinct impacts on the different asset classes within the bond market. Reinvestment risk. This is interest rate risk, which causes the reinvestment risk and liquidation risk; It affects the rate at which coupon payments can be reinvested, and affects the price at which a bond can be sold (prior to maturity). Reinvestment Risk and Interest Rate Risk. To reduce reinvestment risk, it is beneficial if interest rates increase. Investment bonds often fall into either the “low risk” or “high risk” classification, but this covers only half of the story. Reinvestment risk is the risk that future cash flows – either coupons (the periodic interest payments on the bond) or the final return of principal – will need to be reinvested in lower-yielding securities. From the Uncertainty of the bond market received from securities, it is beneficial if interest rates increase changes. Bond is A. the risk that arises from the Uncertainty of the bond 's.. At which the future cash flows would expose the banks to variations in NII as the investor then! 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