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?
Hi, Can you pls tell me which CFA lv1 material states that? because as I read in the Fundamentals of Financial Management book, they also say: "Note that price risk relates to the current market value of the bond portfolio, while reinvestment risk relates to the income the portfolio produces. If you hold long-term bonds, you will face significant price risk because the value of your portfolio will decline if interest rates rise, but you will not face much reinvestment risk because your income will be stable. On the other hand, if you hold short-term bonds, you will not be exposed to much price risk, but you will be exposed to significant reinvestment risk." ( and of course in the case that the long-term bonds are noncallable)
Hi there friend. Sorry for the late reply. I would really like to see this text. Reinvestment risk is LOWER for long-term bonds, no HIGHER. With long-term bonds, your coupon is fixed, which means that if you hold them until maturity, you know exactly what you'll be getting for a long period of time. So, you don't have to worry about getting the face value of your bonds soon, and having to think about where to invest depending on the prevailing interest rates at the time. I hope this offers some clarity. Feel free to reach out.
Hi! I disounted the semi-annual coupon payments at the semi-annual yield (or required rate of return). I recommend watching my video on "Bond Prices and How They Are Related to Yield to Maturity" to understand the concept and calculation: ua-cam.com/video/BqFc3iosyqQ/v-deo.htmlsi=KKF4EVj7opX1E1d8
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?
Sorry if you found this confusing. But it seems like you've got it. Reinvestment risk is precisely the idea that if you are already bought into a bond that is offering a high yield, and if yields drop after one year, any intermediate cash flows that you will get from the bond will now need to be reinvested at a higher price (and hence a lower yield) for the same kind of bond.
Loving these videos. I like how you first show how the concept works "intuitively" and then show the math behind it. Well done.
Thanks, unbelievably good video, explains the whole topic very clearly!
Glad to hear it! Thank you.
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
This is super super easy to understand
great explanation. thank you very much.
very clear explanation
thank you
Great explanation
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?
Agreed
Hi, Can you pls tell me which CFA lv1 material states that?
because as I read in the Fundamentals of Financial Management book, they also say: "Note that price risk relates to the current market value of the bond portfolio, while reinvestment risk relates to the income the portfolio produces. If you hold long-term bonds, you will face significant price risk because the value of your portfolio will decline if interest rates rise, but you will not face much reinvestment risk because your income will be stable. On the other hand, if you hold short-term bonds, you will not be exposed to much price risk, but you will be exposed to significant reinvestment risk." ( and of course in the case that the long-term bonds are noncallable)
Hi there friend. Sorry for the late reply. I would really like to see this text. Reinvestment risk is LOWER for long-term bonds, no HIGHER. With long-term bonds, your coupon is fixed, which means that if you hold them until maturity, you know exactly what you'll be getting for a long period of time. So, you don't have to worry about getting the face value of your bonds soon, and having to think about where to invest depending on the prevailing interest rates at the time.
I hope this offers some clarity. Feel free to reach out.
Nicely Explained.
Respectfully, how did you arrive at the Price of Bond A and Bond B at different interest rates?
Hi! I disounted the semi-annual coupon payments at the semi-annual yield (or required rate of return). I recommend watching my video on "Bond Prices and How They Are Related to Yield to Maturity" to understand the concept and calculation: ua-cam.com/video/BqFc3iosyqQ/v-deo.htmlsi=KKF4EVj7opX1E1d8
excellent,thank you.
I am having a midterm exam in the next 4 hours. Thanks for your helpful videos 😭
Let me know if you need help with anything! Best of luck.
On my watchlist
excellent
I agree, longer maturity bonds have higher reinvestment risk
Hello @fawanas111. This is untrue. Please see my response below also.
Thank you so much
học hành tốt nha =))
@@hanzoko8080 dạ
thanks
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?
Sorry if you found this confusing. But it seems like you've got it. Reinvestment risk is precisely the idea that if you are already bought into a bond that is offering a high yield, and if yields drop after one year, any intermediate cash flows that you will get from the bond will now need to be reinvested at a higher price (and hence a lower yield) for the same kind of bond.