Question

poornima gupta is retiring soon, so she is concerned about her investments providing her steady income every year. she is aware that if interest rates rise, the potential earnings power of the cash flow from her investments will increase. in particular, she is concerned that a decline in interest rates might lead to decrease in annual income from her investments. what kind of risk is poornima most concerned about protecting against?

Answer 1

In a case whereby poornima gupta is retiring soon, so she is concerned about her investments providing her steady income every year, the risk is poornima most concerned about protecting against is interest reinvestment risk.

What is interest reinvestment risk?

Reinvestment rate risk  can be described as the risk that should be considered in the case whereby the investor  have the reason to carry out  reinvestment in regards with the future cash flows  which could come inform of a  lower return  as a result of the interest rate declines.

It should be that this risk is very important to be taken serious by the investors because any slight mistake can result to very huge lost in the part of the investor and this can bring down there investor in term of finance which is very dangerous for his health as well as other investment that he have outside.

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