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What is reinvestment rate risk? Which has morereinvestment rate risk: a 1-year bond or a...

What is reinvestment rate risk? Which has more reinvestment rate risk: a 1-year bond or a 10-year bond.

please explain

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Expert Solution

Reinvestment rate risk is the possibility that cash flows received will not be reinvest at a comparable / same rate in the future. i.e. The Coupon received will be reinvested at some rate but it is possible that these coupons may not be invested at the same rate.

The higher the maturity, higher will be the reinvestment risk.

Therefore, the Bond with 10 year will be more prone to the reinvestment rate risk.

jeff jeffy answered 2 years ago
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