Series 7: 10.2.6. Reinvestment Risk

10.2.6. Reinvestment Risk

Reinvestment risk is the risk that the investor will get his capital back early. Recalling the old saying about “a bird in the hand,” you might think that getting your money back is no kind of risk at all. But it is, for two reasons. First, it deprives the investor of the returns he might have earned if the capital had remained invested. Second, the same economic conditions that caused the return of his capital might force him to reinvest the money at a lower rate of return (at least if he wants an investment that is comparable to his old one in terms of risk).

For example, if interest rates decline, mortgage-backed agency bonds, such as Fannie Mae and Freddie Mac, can be susceptible to reinvestment risk. When