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What is re-investment risk?

Re-investment risk

The risk that an investor will get a lower rate of return if they decide to reinvest the money they've made from one investment in another. This problem is more likely to arise during periods of falling interest rates.

Where have you heard about re-investment risk?

It's a term that's particularly common in the bond markets. If a bond's interest rate has fallen, an investor will be offered a lower rate of return compared to the last time they invested.

What you need to know about re-investment risk.

The term applies when an individual can't reinvest the cash they've made on an investment at the same rate of return they've previously enjoyed.

But it also specifically relates to callable bonds. With these bonds, the issuer has the power to recall them before their maturity date, by buying them back from investors. They're then replaced with new bonds that offer a lower interest rate. So the risk here is that investors won't receive the full interest they were expecting.

Find out more about re-investment risk.

For more information on how bonds work, take a look at our definitions of bond yield and coupon.

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