Bond Valuation: Interest Rate Risk, Price Risk and Reinvestment Risk

In this video, I explain the concepts of interest rate risk, price risk and reinvestment risk as they relate to bond investments. Students will understand how price risk and reinvestment risk of a bond depend on its time to maturity and its coupon payments. This will also help them understand more advance bond valuation concepts like Duration. Finally, students will also learn why it generally makes sense for investors to match their investment horizon with the time to maturity (or Duration) of bonds.

Students will particularly find this video useful in understanding parts of Chapter 8 (Interest Rates and Bond Valuation) of Corporate Finance (13th Edition) by Ross, Westerfield, Jaffe and Jordan.

[LoganS-fp]

Loving these videos. I like how you first show how the concept works "intuitively" and then show the math behind it. Well done.

[darthveder]

Thanks, unbelievably good video, explains the whole topic very clearly!

[Invest-qhjh]

Aaand watched it! Great video. Looks like reinvestment risk is more of a burden than a risk, since more money upfront is obviously not a bad thing

[vythao]

This is super super easy to understand <3 Thank you a lot!

[khusannome]

great explanation. thank you very much.

[JK-codu]

Hello Professor, thank you for your video. The CFA level 1 material states: "The bond with the highest coupon and the longest maturity will have the greatest reinvestment risk." Which is contradictory to your video, in which you state that a shorter maturity leads to higher reinvestment risk. Could you clarify this please?

[phamthithuytien]

I am having a midterm exam in the next 4 hours. Thanks for your helpful videos 😭

[fawanas]

I agree, longer maturity bonds have higher reinvestment risk

[zan]

Ok this terminology is really confusing me about interest rates. You said at the start of the video "interest rates/yields". And you have maintained that. So interest rate is a different concept and yield is a different concept. In fact, here the yield is yield to maturity. You are saying that when an investor's required rate of return goes down, the interest rate (amount of returns) a bond gives goes down as well, which is confusing.

Are you saying that because the investor's required rate of return goes down, the price of the bond goes up, so when you reinvest, you have to spend more money to purchase a new bond and so the returns you get will not be high enough because of the increased purchase price? Or is there something else that just makes people issue lower coupon payment bonds because of lower yield to maturity somehow?