Business and Personal Finance Dictionary

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• REINVESTMENT RISK
  
  When you use the money from a maturing fixed-income investment, such as a certificate of deposit (CD) or a bond, in order to make a new investment of the same type, there's no guarantee that you will earn the same rate of return on your new investment as on the one coming due. In fact, the return could be significantly lower (or higher), based on what's happening in the economy at large. This unpredictability is known as reinvestment risk. For example, if a bond paying 10% interest matures when the current rate is 5%, you must settle for a lower return if you buy a new bond or choose some other type of investment. One way to limit reinvestment risk is by using an investment technique known as laddering, which means splitting your investment among a number of bonds (or CDs) with different maturity dates. That way only part of your total investment will mature and have to be reinvested at any one time.
  
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