Reinvestment Rate

Your Uncle Bernie offers you a sweet deal. He's got an investment fund that pays out a guaranteed 12% a year. You give him a check for $100,000. In a year, he sends you $12,000...your 12% return for Year One.

You want to reinvest that money. Bernie says you can't give the money back to him; his investment fund is now closed. So you need to find another place for it. Unfortunately, nothing offers as good a return as Uncle Benie. You eventually settle for a bond that pays a 6% return.

Your reinvestment rate is 6%. It's the amount that an investor can make when they reinvest the cash flows they earn from another investment.