Reinvestment rate, also known as the reinvestment risk or the rollover risk, is a financial term that refers to the rate at which cash flows from an investment can be reinvested to generate additional returns. When an investment, such as a bond or a dividend-paying stock, matures or pays out dividends, the investor receives cash. The reinvestment rate is the rate at which the investor can reinvest this cash to earn new returns.

The concept of reinvestment rate is crucial because it impacts the overall return an investor can earn from their initial investment. A higher reinvestment rate allows investors to compound their returns over time, leading to a more significant final payout. On the other hand, a lower reinvestment rate may result in diminished compounding effects and lower overall returns.

Reinvestment rate risk is particularly relevant in fixed-income investments, such as bonds, where periodic interest payments and the return of the principal at maturity provide cash flows. If interest rates decline, the reinvestment of these cash flows into new bonds with lower yields can reduce the total return on the investment.

In investment analysis, it is common to consider different scenarios of reinvestment rates to understand how they can impact the final outcome of an investment strategy. Additionally, the concept of reinvestment rate is essential in evaluating the true performance of an investment portfolio over time, as it reflects the ability to utilize cash flows efficiently to generate additional income.