Reinvestment Risk
The risk that cash flows from an investment must be reinvested at a lower rate than the original investment's return.
What is Reinvestment Risk?
Reinvestment risk is the possibility that the cash flows generated by an investment — coupon payments, dividends, or principal repayments — will have to be reinvested at a lower interest rate or yield than the original investment, reducing the overall realized return. It is most significant for fixed-income investors: a 10-year bond paying a 5% coupon generates semiannual cash flows that must be reinvested; if rates fall during the bond's life, those coupons earn less than 5%, reducing the total realized return below the yield-to-maturity calculated at purchase. Callable bonds carry the highest reinvestment risk because issuers tend to call bonds when rates fall and the issuer can refinance more cheaply — precisely when investors face the worst reinvestment opportunities. Zero-coupon bonds eliminate reinvestment risk by making no interim payments (the entire return is captured at maturity). For equity investors, dividend reinvestment at depressed prices can actually benefit long-run returns — a phenomenon distinct from fixed-income reinvestment risk.
Example
An investor buys a 10-year Treasury bond with a 5% yield in 2019. When the bond matures in 2029, they must reinvest the $100,000 principal. But interest rates have fallen to 3% by 2029. Instead of the 5% income they had planned their retirement cash flow around, they can only earn 3% on the reinvested principal — a meaningful reinvestment risk outcome.
Source: Investopedia — Reinvestment Risk