Quick question: Why lower coupon has high reinvestment risk? question

mkytz15

Why lower coupon has high reinvestment risk?
Thx a bunch guys!

dece2011

Maybe lower coupon = more likely that the bond will be called if interest rate changes hence more reinvestment risk???

former

lower coupon bonds have HIGHER interest rate risk because the amount of money you get back is heavily relied on the lumpsum payment at the end of maturity.
lower coupon bonds have LOWER reinvestment risk.

luckygiftvn

you r right, it should be lower coupon have lower reinvestment rate. But why is that?

mdfb79

momo678 wrote:
you r right, it should be lower coupon have lower reinvestment rate. But why is that?


reinvestment risk is the risk you will not be able to reinvest earnings throughout the period AT THE SAME YIELD.
So, the lower the rate, the more likely you can reinvest your coupon payments AT THAT SAME YIELD or higher.
where as, if your coupon rate was HIGH, then it would be more likely that, when the time came to reinvest, you would be faced with lower rates. That isn’t NECCESSARILY the case, but the risk is higher in that case than if you started at a time with relatively lower coupon rates.