What is the risk of reinvestics?
When a person invests, these can be several categories of risk. One of them is referred to as the risk of reinvestics. This situation arises when the invested funds generate income that will be subject to a lower return on reinvestment. This term is commonly used to consider investment in fixed income that set maturity data, such as deposit certificates (CD) and bonds.
There are several things that need to be understood than a person can fully understand the risk of reinvestics. First, the person must know that when the investment is successful, its money will grow. This growth, usually in the form of interest or dividends, can be paid to the investor or can be reinvested for further growth. This applies to the amount that a certain investment has earned. For example, if a person bought a CD of $ 100 (USD) $ 100 and had $ 110 at the end of the year, the return rate would be 10 percent.
If the investor decided to allow $ 110 to stay on the CD for another year, reinvested. At the end of tOho periods can find that its $ 110 USD earned only $ 5.50 USD, which is 5 % return. This investor has therefore been the victim of reinvesting risk, because its initial investment of $ 100 had a double return level as reinvested funds.
There are a number of factors that can create this type of situation. One example is fluctuating interest rates. In the case of bonds, the risk of reinvestics is normally realized when the loans are repaid in time.
In these situations, investors often find that certain investment opportunities can be completely removed. Bonds are issued to help generate immediate income, usually for large businesses or government agencies. Funds used to buy bonds will be paid to Bondholders later. The period of many years is usually set for repayment.
During this time period, the bond holder earns the interest on the money thatHe owes him. However, if his bond is ready in 10 years, but all the money is paid off in eight years, not only losing interest in two years, but must find another investment opportunity. The chance that he can earn less than his original bond is the risk of reinvestics.