What is a Reinvestment Rate?
How Does a Reinvestment Rate Work?
dividend, but what does he do with that when he gets it? If he chooses to invest it in a CD that pays 4%, then his reinvestment rate is 4%.simply, an investor might receive, say, a 6%
For a more real-world example, consider a Company XYZwith a 10% to . In order for an investor to actually receive the expected to , he or she must reinvest the payments at a rate equal to the to (10%). That is, she must have a 10% reinvestment rate. This is not always possible. If the investor could only reinvest at 4% (perhaps because returns fell after the were issued), the investor's on the would be lower than expected.
Why Does a Reinvestment Rate Matter?
Reinvestment rate is a common part of rate of return is called ., but really any that generates flows exposes the investor to the need to find good reinvestment rates. The risk that the reinvestment rate not be as high as the initial