Economics Bonds Questions
The impact of reinvestment risk on bond prices is that it can cause bond prices to decrease. Reinvestment risk refers to the uncertainty of being able to reinvest the periodic interest payments or principal repayments at the same rate of return as the original bond investment. If interest rates decline, the investor may have to reinvest the cash flows at lower rates, resulting in lower overall returns. This decrease in potential returns can lead to a decrease in demand for the bond, causing its price to fall.