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What is reinvestment risk?

Reinvestment risk

This is the chance that the cash flows from an investment might have to be reinvested in a way that does not match the proceeds of the original, for example at a lower interest rate.

Where have you heard of reinvestment risk?

It’s particularly associated with pension funds, especially cash investments as their short-term nature means there is always a risk that any future proceeds may have to be reinvested at a lower interest rate.

What you need to know about reinvestment risk.

It occurs when you have money from an investment, such as a bond, that’s maturing and you want to make a new investment of the same type. You may not be able to get the same rate of return on your new investment as you did on the old one. The return could be much lower, although it could also be higher. So for example, if a bond paying 5% interest matures when the current rate is 3%, you will have to settle for a lower return if you buy a new bond. One common way of limiting reinvestment risk is to use a technique called laddering. This involves splitting investments among a number of bonds or certificates of deposit that mature at different times.

Find out more about reinvestment risk.

This is one of the main categories of financial risk. Find out more about what this means with our guide.

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