When there is a parallel shift to the yield curve, the yield-to-maturity and coupon reinvestment rates are assumed to change by … Remember the cardinal rule of bonds: When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. Making an investment in bonds carries two kinds of risk: interest rate risk and credit risk. When reinvesting proceeds from investments, it is beneficial to have a higher interest rate, as the investor will then obtain higher returns. Interest Rate Risk. reinvestment risk is the risk that a bond's future coupon payments may have to be reinvested at a lower rate than the bond's yield to maturity interest rate that is adjusted for actual changes in price level is 13. Reinvestment risk. 2. In reinvestment rate risk, the concern isn't price, but rather the ability to reinvest the money received from a bond at the same rate. Reinvestment risk is the risk that an investor will be unable to reinvest a bond’s cash flows (coupon payments) at a rate equal to the investment’s required rate of return. considered risk.) B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. Investment Horizon, Macaulay Duration, and Interest Rate Risk The investment horizon is essential in measuring the interest rate risk of a fixed-rate bond. Interest rate risk is the risk that changes in interest rates (in the U.S. or other world markets) may reduce (or increase) the market value of a bond you hold. #1 – Duration Risk – It refers to the risk arising from the probability of unwilling pre-payment or extension of the investment beyond the pre-determined time period. Reinvestment Risk and Interest Rate Risk. C. the unsystematic risk caused by factors unique in the bond. The interest-rate risk of a bond is A. the risk related to the possibility of bankruptcy of the bond's issuer. Unexpected bond price changes will occur if market interest rates changes unexpectedly. Reinvestment risk arises when reinvesting the income received from securities. Investment bonds often fall into either the “low risk” or “high risk” classification, but this covers only half of the story. To reduce reinvestment risk, it is beneficial if interest rates increase. Reinvestment Rate Risk. #2 – Basis Risk – It refers to the risk of not experiencing the exact opposite behavior to interest rate changes in the securities with inverse features. This is interest rate risk, which causes the reinvestment risk and liquidation risk; It affects the rate at which coupon payments can be reinvested, and affects the price at which a bond can be sold (prior to maturity). Reinvestment risk is the risk that future cash flows – either coupons (the periodic interest payments on the bond) or the final return of principal – will need to be reinvested in lower-yielding securities. 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