UK Accounting Glossary
The reinvestment rate is the amount of interest that can be earned when money is taken out of one fixed-income investment and put into another.
Pertaining to the interest rate at which an investor is able to reinvest income earned on an existing investment.
For the purpose of calculating the Reinvestment Rate, the most recent statistical release shall be used.
Divide the company’s capital expenditures by the net income to determine the reinvestment rate.
For example, if a company has $100,000 in net income and $50,000 in capital expenditures, the reinvestment rate is equal to $50,000/$100,000 = 50%.
Reinvestment risk is the risk that future cash flows – either coupons (the periodic interest payments on the bond) or the final return of principal – will need to be reinvested in lower-yielding securities.
This means that in the calculation, any cash flow – such as earnings, interest, rents or dividends- are reinvested at the assumed rate.
The rate assumption for reinvestment can have a significant effect on the projected results for an investment or project.
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This glossary post was last updated: 5th May 2019.