Interest rate risk and reinvestment risk? Pls HELP!

Hi All,

Are these two things the same or different?

I thought interest rate risk and reinvestment risk are the same, i.e. the risk of being able to invest the coupon payments and on what rate.

In my way of thinking the higher the coupon rate the bigger the reinvestment risk

And then I came across a question which tells that the lowest coupon rate has the highest reinvestment risk and the explanation is that more of the bond’s value comes from repayment of face value which occurs at the end of the bond’s life.

Does this make sense? Am I totally misunderstanding?

Thx in advance.

Higher coupon rate = Higher reinvestment risk

Longer matruity = Higher reinvestment risk / Higher interest rate risk

Yes this is what I think higher coupon rate = higher reinvestment risk.

But I have a CFA mock question in front of me (I just cannot exactly quote it as far as I know) which tells that lowest coupon rate = highest interest rate risk.

And since it says interest rate risk and not reinvestment risk I’m wondering:

  • are these two not the same?

  • or is this an erroneous answer?

  • or am I totally misunderstanding the concept?

Well, since you have a lower coupon rate, less of your cash inflows are in the form of coupon payments, and thus your YTM is more exposed to changes in interest rates leaving you with a higher interest rate risk.

Interest rate risk and reinvestment risk are seperate things

OK this makes sense.

Although in the CFAI book the section introducing the whole concept of reinvestment risk and price risk is titled “Interest rate risk on fixed rate bonds”

Schweser systematically calls it reinvestment risk.

This is my biggest fear now. Misunderstanding the question. Honestly the more tired I am the poorer my English gets.

In a lot of texts (particularly at the intro level), they use terms loosely. In many cases. I’ve seen “price risk” referred to as "interest rate risk. " and it looks like this might be the case here.

In the CFA curriculum, there’s two parts to “interest rate risk” - price risk (the effect of a change in YTM on the bond’s price), and and reinvestment rate risk (where lower rates mean that the coupons can be reinvested at a lower rate).

Price risk is highest for longer maturity and lower-coupon bonds.

Reinvestment risk is higher for longer maturity and higher-coupon bonds (and bonds with prepayment options, but this is sometimes categorized separately as prepayment risk or otpion risk - but it’s really a special case of reinvestment risk).

Another thread on the same topic:

Also, I just finished an article on the risks associated with investing in fixed income securities that covers this:

Thank you both.

Most helpful.

Good to hear.

Happy to help.