There is often a significant risk involved for the holders of bonds when it comes to reinvesting. It is important to understand that the rate of return is going to be less if the rates drop. This is because that process prevents most investors from successfully being about to invest at the assumed rate.
Investors need to be very careful with this when there is a trend of interest rates continuing to drop. Knowing your reinvestment risk rate will help you to calculate the overall risk that is involved with particular types of investments. The fact that the dividends from the initial investment may not be invested at the same or a higher rate is something you will have to be prepared for.
The issue of the reinvestment risk rate pertains more to those that engage in long term bonds than short term investments. This is because they may have to be reinvested after rates have dropped from what the purchase price was. This is one of the main calculations that investors look at when they want to predict what their risk is for a given investment.
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