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Q: What are the advantages of reinvestment rate risk over interest rate risk?
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What is the difference between interest rate risk and reinvestment rate risk?

Reinvestment risk When interest rates are declining, investors have to reinvest their interest income and any return of principal, whether scheduled or unscheduled, at lower prevailing rates.Interest rate risk When interest rates rise, bond prices fall; conversely, when rates decline, bond prices rise. The longer the time to a bond's maturity, the greater its interest rate risk.


What is the definition of reinvestment assumption?

The definition of reinvestment assumption is an assumption made concerning the rate of return that can be earned on the cash flows generated by capital budgeting projects. The cash flow can be interest, earnings, dividends, or rent.


What is bond immunization?

Strategy to derive a specified rate of return regardless of what happens to market interest rates over holding period. Seeks to offset the opposite changes in bond valuation caused by price effect and reinvestment effect -price effect: change un bond value caused by interest rate chnages -reinvestment effect: as coupon payments are received, they are reinvested at higher or lower rates that original coupon rate. Bond immunization occurs when the average duration of the bond portfolio just equals the investment time horizon


What is an advantage of having an interest rate credit card?

The advantages of having a credit card with an interest rate is it helps build one's credit faster. The higher the interest rate of the credit card, the higher the credit score.


What are the advantages to an amortization loan?

The advantages of an amortization loan is that there is much less of a credit risk and there is also much less of an interest rate risk because the loan is paid quicker so there is less effect from the interest rate.

Related questions

What is the difference between interest rate risk and reinvestment rate risk?

Reinvestment risk When interest rates are declining, investors have to reinvest their interest income and any return of principal, whether scheduled or unscheduled, at lower prevailing rates.Interest rate risk When interest rates rise, bond prices fall; conversely, when rates decline, bond prices rise. The longer the time to a bond's maturity, the greater its interest rate risk.


What is the definition of reinvestment assumption?

The definition of reinvestment assumption is an assumption made concerning the rate of return that can be earned on the cash flows generated by capital budgeting projects. The cash flow can be interest, earnings, dividends, or rent.


What advantages do ARM loans have over regular mortgages?

One of the main benefits an ARM loan has over a regular mortgage is the interest rate. Should the interest rate drop, one with an ARM loan has an advantage of a lower interest rate without having to refinance. Monthly payments will be lower as well with an ARM loan due to fluctuating interest rates.


What is bond immunization?

Strategy to derive a specified rate of return regardless of what happens to market interest rates over holding period. Seeks to offset the opposite changes in bond valuation caused by price effect and reinvestment effect -price effect: change un bond value caused by interest rate chnages -reinvestment effect: as coupon payments are received, they are reinvested at higher or lower rates that original coupon rate. Bond immunization occurs when the average duration of the bond portfolio just equals the investment time horizon


What is an advantage of having an interest rate credit card?

The advantages of having a credit card with an interest rate is it helps build one's credit faster. The higher the interest rate of the credit card, the higher the credit score.


What are the advantages to an amortization loan?

The advantages of an amortization loan is that there is much less of a credit risk and there is also much less of an interest rate risk because the loan is paid quicker so there is less effect from the interest rate.


What is the problem with reinvestment rate assumption?

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What is a fixed rate mortgage?

A fixed rate mortgage is a loan with an interest rate that does not change over time. Whatever the interest rate is when the loan is taken out, will be the interest rate for the entire duration of the loan.


What are the advantages of fixed loans?

Fixed rate loans have many advantages over adjustable rate loans. One advantage would be that, with a fixed rate loan, one would never need to worry about their payments or interest rates changing. Fixed rate loans also come in a variety of different lengths and payment plans.


What are the advantages to a 30 year mortgage interest rate?

The advantages of a 30 year mortgage interest rate are that you have a fixed repayment amount each month over the life of the loan making it easier to budget. With wages gradually increasing each year "during good economic times" the proportion of your wages going towards repayments gradually decreases.


What is the relationship between short term and long term interest rate?

A short term interest rate occurs over a short period of time. A long term interest rate occurs over a long period of time.


Is a 4.79 Interest rate good rate?

The answer depends on the following factors:whether you are paying it or earning it,what the rate of inflation iswhat your expectations are for the rate of inflation/interest over the duration.