Reinvestment Risk
Chapters in this video
What this video covers
- Why falling interest rates trigger reinvestment risk, and why investors receiving timely cash flows can still lose purchasing power
- Why callable bonds carry the highest reinvestment risk, and the chronological steps from rate drop to forced reinvestment at lower yields
- How mortgage-backed securities (MBS) expose investors to prepayment risk when homeowners refinance at lower rates
- Why high-coupon bonds suffer more reinvestment risk than low-coupon bonds (more cash flow equals more exposure)
- Why zero-coupon bonds have zero reinvestment risk (no periodic coupons means nothing to reinvest)
- Why zero-coupon bonds still carry maximum interest rate risk despite having zero reinvestment risk
- How interest rate risk and reinvestment risk move in opposite directions, and why the exam constantly tests this seesaw relationship
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