Interest Rate Reinvestment Risk
Explain the term Interest Rate Reinvestment Risk in detail?
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Interest Rate Reinvestment Risk - The YTM computation supposes that the investor reinvests all coupons obtained from a bond at a rate equivalent to the evaluated YTM on that bond, thus earning interest on interest over the life of bond at evaluated YTM. In effect, this computation supposes that the reinvestment rate is the yield to maturity. When the investor spends the coupons, or reinvests them at a rate distinct from the supposed reinvestment rate, the realized yield which will really be earned at the termination of the investment in the bond will vary from the promised YTM. And, actually coupons nearly always will be reinvested at rates higher or lower than the evaluated YTM, resultant in a realized yield which varies from the promised yield. This provides rise to reinvestment rate risk.
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Table illustrates the average retail price of milk and the Consumer Price Index from the year 1980 to 1998. Discover Q & A Leading Solution Library Avail More Than 1449990 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads No hassle, Instant Access Start Discovering 18,76,764 1960769 Asked 3,689 Active Tutors 1449990 Questions Answered Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!! Submit Assignment
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