Interest-Rate & Reinvestment Risk

Interest-rate risk is the chance that rising rates push existing bond prices down — worst for long maturities and low coupons; reinvestment risk is its mirror: falling rates force coupons and called principal to be reinvested at lower yields.

These two risks trade off against each other: locking in long maturities raises price risk but reduces reinvestment uncertainty, and vice versa. Laddering maturities is the standard compromise.

Related terms

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