B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. The interest-rate risk of a bond is A. the risk related to the possibility of bankruptcy of the bond's issuer. Reinvestment Rate Risk. 2. Unexpected bond price changes will occur if market interest rates changes unexpectedly. Making an investment in bonds carries two kinds of risk: interest rate risk and credit risk. Interest Rate Risk. #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. C. the unsystematic risk caused by factors unique in the bond. When reinvesting proceeds from investments, it is beneficial to have a higher interest rate, as the investor will then obtain higher returns. 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. Investment Horizon, Macaulay Duration, and Interest Rate Risk The investment horizon is essential in measuring the interest rate risk of a fixed-rate bond. #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. Investment bonds often fall into either the “low risk” or “high risk” classification, but this covers only half of the story. 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. These two influences can have very distinct impacts on the different asset classes within the bond market. 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. Any mismatches in cash flows would expose the banks to variations in NII as the market interest rates move in different directions. To reduce reinvestment risk, it is beneficial if interest rates increase. When there is a parallel shift to the yield curve, the yield-to-maturity and coupon reinvestment rates are assumed to change by … 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. Reinvestment risk arises when reinvesting the income received from securities. considered risk.) Interest rate risk applies price action: the price of the investment is higher at the end of the period than at the beginning of the period because interest rates fell between 2010 and 2020: a share of the mutual fund cost $10.72 in 2010 and $11.64 in 2020. Reinvestment Risk and Interest Rate Risk. 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