36:
305:
Mortgage loans typically include a prepayment option, which permits the borrower to repay a portion or all of the loan before scheduled maturity. This creates reinvestment risk for lenders and mortgage-backed securities holders. Early termination of the loan can also occur when the borrower sells the
301:
One form of reinvestment risk is the possibility that the cash flows from an investment might somehow be cancelled or stopped before its stated maturity date. This could happen if the issuer has the right to redeem (or "call") a fixed income security before its contractual maturity date. In that
318:
If market rates of interest decrease after the initial investment is made, reinvestment risk works against the security holder, since future interest payments to the investor will be reinvested at a lower return than expected when the bond was purchased. As finance scholar Dr. Annette Thau has
319:
observed, the use of the term "risk" in this case is not quite correct because there is no actual risk of loss, either of principal or interest. "But... if you reinvest coupons at a lower rate than the quoted to you , actual return will then be lower than the
306:
property, refinances the loan or defaults. In each case, the lender and the holder of a mortgage-backed security cannot be certain of receiving the expected cash flows from the loan. Prepayment models have been developed to help deal with this risk.
314:
Investors who plan to reinvest periodic interest (or "coupon") payments face uncertainty because the returns (interest rates) at which those cash flows will be reinvested cannot be known at the time of the initial purchase.
372:
Pension funds are 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.
333:
have offsetting effects: higher market rates decrease the market value of the bond, but increase the interest earned on reinvested coupons. A bond portfolio strategy known as
1328:
1107:
265:
1239:
1186:
326:
When interest rates rise, reinvestment risk works in the security holder's favor because cash flows received can be reinvested in higher-yielding securities.
361:, because payments are received as frequently as every month. Bonds purchased at a premium are more susceptible to reinvestment risk than discount bonds.
414:
1312:
861:
344:
have observed, securities with a longer term to maturity carry greater reinvestment risk. The same is true of bonds with high coupon rates.
258:
354:, have no coupon reinvestment risk because they have no periodic coupon payments, interest being paid in full when the bond matures.
1155:
1130:
1091:
729:
351:
1008:
811:
251:
407:
35:
694:
586:
364:
For investors who plan to spend, rather than invest, a security's cash flows, reinvestment risk may not be an issue.
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case, the investor might not be able to find a new investment which is as attractive as the security being redeemed.
758:
846:
427:
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1307:(third ed.). Hoboken NJ: John Wiley & Sons, Inc. pp. 140–141.
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821:
16:
Form of financial risk primarily associated with fixed income securities
876:
293:), in the form of early redemption risk and coupon reinvestment risk.
943:
1125:(third ed.). Upper Saddle River, NJ: Prentice Hall. p. 6.
958:
396:
1240:"2022 Curriculum: Understanding Fixed-Income Risk and Return"
1086:(Fifth ed.). New York: McGraw-Hill. pp. 512–513.
1303:
Liebowitz, Martin L. and Homer, Sidney (29 April 2013).
1187:"Investment Improvement: Adding Duration to the Toolbox"
1150:(Revised ed.). New York: McGraw-Hill. p. 60.
799:
660:
625:
577:
489:
441:
434:
357:Reinvestment risk is particularly important for
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337:takes advantage of these offsetting effects.
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1327:: CS1 maint: multiple names: authors list (
1106:: CS1 maint: multiple names: authors list (
1082:Fabozzi, Frank J. and Ramsey, Chuck (1997).
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415:
401:
393:
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18:
323:quoted to you when you bought the bond."
1084:The Handbook of Fixed Income Securities
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229:
222:
179:
151:
123:
75:
42:
26:
1320:
1099:
1123:Bond Markets, Analysis and Strategies
7:
285:. It is primarily associated with
14:
1191:Federal Reserve Bank of St. Louis
690:Conditional Value-at-Risk (CVaR)
34:
352:U.S. Department of the Treasury
1009:Strategic financial management
812:Asset and liability management
1:
340:As Thau and finance scholar
587:Operational risk management
1365:
1121:Fabozzi, Frank J. (1996).
759:Proportional hazards model
710:Interest rate immunization
359:mortgage-backed securities
350:, which are issued by the
1042:
428:financial risk management
705:First-hitting-time model
670:Arbitrage pricing theory
1185:Neely, Michelle Clark.
1014:Stress test (financial)
720:Modern portfolio theory
287:fixed income securities
1146:Thau, Annette (2001).
329:Reinvestment risk and
1305:Inside the Yield Book
1290:Fabozzi op cit p. 353
1052:Investment management
954:Investment management
680:Replicating portfolio
456:Sovereign credit risk
1057:Mathematical finance
989:Risk-return spectrum
979:Mathematical finance
934:Fundamental analysis
867:Exchange traded fund
451:Consumer credit risk
1226:Fabozzi op cit p. 6
1212:Fabozzi op cit p. 6
1047:Financial economics
1004:Statistical finance
770:Value-at-Risk (VaR)
675:Black–Scholes model
515:Holding period risk
310:Coupon reinvestment
1276:Thau op cit p. 108
1024:Structured product
1019:Structured finance
999:Speculative attack
685:Cash flow matching
648:Non-financial risk
545:Interest rate risk
471:Concentration risk
331:interest rate risk
231:Non-financial risk
86:Interest rate risk
58:Concentration risk
1314:978-1-118-39013-9
1262:Thau op cit p. 60
1172:Thau op cit p. 60
1065:
1064:
837:Corporate finance
832:Capital structure
786:Cash flow at risk
782:Liquidity at risk
755:Survival analysis
656:
655:
602:Reputational risk
476:Credit derivative
348:Zero-coupon bonds
342:Dr. Frank Fabozzi
321:yield to maturity
279:Reinvestment risk
276:
275:
190:Reputational risk
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1162:
1161:
1143:
1137:
1136:
1118:
1112:
1111:
1105:
1097:
1079:
939:Growth investing
857:Enterprise value
807:Asset allocation
790:Earnings at risk
772:and extensions (
715:Market portfolio
579:Operational risk
564:Refinancing risk
439:
417:
410:
403:
394:
297:Early redemption
268:
261:
254:
195:Operational risk
134:Refinancing risk
38:
19:
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1242:. CFA Institute
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1038:
974:Systematic risk
872:Expected return
852:Economic bubble
847:Diversification
842:Cost of capital
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555:Volatility risk
519:Price area risk
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461:Settlement risk
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153:Investment risk
111:Volatility risk
53:Settlement risk
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800:Basic concepts
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633:Execution risk
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612:Political risk
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560:Liquidity risk
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552:
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542:
540:Margining risk
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532:
530:Valuation risk
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481:Securitization
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424:Financial risk
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388:Liquidity risk
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383:Financial risk
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283:financial risk
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240:Stranded asset
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172:Valuation risk
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167:Execution risk
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144:Margining risk
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125:Liquidity risk
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106:Commodity risk
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91:Inflation risk
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71:
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65:
63:Sovereign risk
60:
55:
47:
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40:
39:
31:
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28:Financial risk
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15:
13:
10:
9:
6:
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3:
2:
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1157:0-07-135862-5
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1148:The Bond Book
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1134:
1132:0-13-339151-5
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1093:0-7863-1095-2
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1029:Systemic risk
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643:Systemic risk
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592:Business risk
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368:Pension funds
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281:is a form of
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181:Business risk
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116:Systemic risk
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99:
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96:Currency risk
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29:
25:
22:Categories of
21:
20:
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1298:
1289:
1284:
1275:
1270:
1261:
1256:
1244:. Retrieved
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1225:
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1194:. Retrieved
1190:
1180:
1171:
1166:
1147:
1141:
1122:
1116:
1083:
1077:
984:Moral hazard
969:Risk of ruin
745:Sharpe ratio
607:Country risk
568:Deposit risk
466:Default risk
371:
363:
356:
346:
339:
335:immunization
328:
325:
317:
313:
304:
300:
278:
277:
215:Moral hazard
200:Country risk
139:Deposit risk
68:Default risk
1349:Market risk
1034:Toxic asset
994:Speculation
927:social work
912:engineering
740:Risk parity
725:Omega ratio
638:Profit risk
525:Equity risk
503:Volume risk
491:Market risk
443:Credit risk
289:(including
224:Profit risk
101:Equity risk
77:Market risk
44:Credit risk
1246:26 January
1196:26 January
1069:References
617:Legal risk
597:Model risk
511:Shape risk
507:Basis risk
435:Categories
210:Legal risk
162:Model risk
1323:cite book
1102:cite book
964:Risk pool
877:Financial
1343:Category
887:analysis
822:Bad debt
700:Drawdown
662:Modeling
377:See also
902:betting
892:analyst
882:adviser
535:FX risk
1311:
1154:
1129:
1090:
944:Hazard
695:Copula
562:(e.g.
501:(e.g.
949:Hedge
907:crime
897:asset
730:RAROC
626:Other
291:bonds
1329:link
1309:ISBN
1248:2022
1198:2022
1152:ISBN
1127:ISBN
1108:link
1088:ISBN
959:Risk
922:risk
426:and
917:law
862:ESG
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