Investors seek bonds with high coupon rates, which offer high returns. But the bond's issuer will not offer compound interest on a bond's principal, as a fixed-rate certificate of deposit might. Instead, when a bond matures, investors must reinvest the interest at a new rate. They face what economists call reinvestment risk, the possibility that this new interest rate will not match the bond's coupon. Interest rates may, however, also rise by the bond's maturation date, offering the investor a chance to earn higher returns.
1. Multiply the bond's principal by its coupon rate. For example, if you buy a bond with an issue price of $2,000 and a coupon of 4.5 percent: $2,000 × 0.045 = $90.
2. Multiply the annual return by the bond's term, which is measured in years. For example, if the bond matures after three years then calculate $90 × 3 = $270.
3. Multiply the sum from the previous step by the interest rate at the time of maturation. For example, if the interest rate is 1.5 percent then $270 × 0.015 = $4.05. This is the bond's reinvested interest for the first year after the initial maturation.
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