Explain : Reinvestment Rate

The reinvestment rate is the amount of interest that can be earned when money is taken out of one fixed-income investment and put into another. For example, the reinvestment rate is the amount of interest the investor could earn if he purchased a new bond while holding a callable bond called due because of an interest rate decline.


Reinvestment rates are of particular concern to risk-averse investors who invest in Treasury bills (T-bills), Treasury bonds (T-bonds), municipal bonds, Certificates of Deposit (CDs), preferred stocks with a stated dividend rate, and other fixed-income investments. These investors—who are often retirees or close to retirement—rely on the steady income provided by their investments. While reinvesting in fixed-income securities is a common retirement portfolio strategy, it does have risks, such as interest rate risk.

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