Reinvestment Risk

The risk that money coming back from an investment can only be reinvested at lower rates.

Reinvestment risk is the danger that cash flows — bond coupons, maturing CDs, called bonds — arrive when rates have fallen, forcing you to reinvest at worse yields. It's the mirror image of price risk: falling rates raise a bond's price but punish everyone rolling over maturing money. Retirees living on CD ladders felt it acutely in the 2010s, renewing 5% certificates at 1%. Zero-coupon bonds eliminate it entirely — there are no payments to reinvest — which is one reason pensions prize them.

When the issuer called the 6% bonds early, holders faced reinvestment risk with new bonds yielding barely 3%.