Risk of reinvestment

 A security's cash flows are typically (or are presumptive) reinvested. The additional revenue from this type of reinvestment, which is also known as interest on interest, is based on the interest rate levels in effect at the time of reinvestment as well as the reinvestment method. Reinvestment risk is the variation in returns from reinvestment from a certain strategy as a result of changes in market rates.

Here, there is a potential for a decline in the interest rate at which intermediate cash flows may be reinvested. Longer holding durations are associated with higher reinvestment risk. Additionally, it works better with products like high-coupon bonds that have big, early cash flows.

It is important to keep in mind that interest rate risk and reinvestment risk are mutually exclusive. For instance, interest rate risk is the possibility that interest rates would increase and cause the cost of fixed income security to decrease. Reinvestment risk, on the other hand, is the chance of falling interest rates. Immunization is a method based on these two counterbalanced hazards.