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.

[@user-uw6xs3ow5b]

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

[@vythao1330]

This is super super easy to understand

[@prakharsharma7543]

very clear explanation thank you

[@fio6179]

Great explanation

[@richarddobosz6174]

excellent,thank you.

[@darthveder1000]

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

[@professorikram]

Glad to hear it! Thank you.

[@Invest-qh3jh]

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

[@yubakafle]

Nicely Explained.

[@pillowsandblankets1432]

excellent

[@JK-co3du]

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?

[@brianhoffman3322]

Agreed

[@hatrang5143]

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)

[@professorikram]

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.

[@Invest-qh3jh]

On my watchlist

[@fawanas111]

I agree, longer maturity bonds have higher reinvestment risk

[@professorikram]

Hello @fawanas111. This is untrue. Please see my response below also.

[@user-gq3qo8uo8z]

thanks

[@phamthithuytien8790]

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

[@professorikram]

Let me know if you need help with anything! Best of luck.

[@hatrang5143]

Thank you so much

[@hanzoko8080]

học hành tốt nha =))

[@hatrang5143]

@@hanzoko8080 dạ

[@zan1971]

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?