What is reinvestment risk?

Reinvestment risk specifically refers to the potential decline in the future income generated from an investment due to falling interest rates. When an investor receives cash flows from fixed-income securities, such as bond coupon payments or the principal at maturity, they often plan to reinvest these cash flows. If interest rates have fallen since the time of the initial investment, the reinvestment of those cash flows may occur at a lower rate than the original investment, resulting in reduced overall returns. This risk is particularly pertinent for investors in longer-duration bonds where cash flows may be received multiple times before maturity.

Other options address different aspects of bond investing. For instance, the risk of losing principal pertains to market or credit risks which may lead to a decrease in the bond's value. Late payments on bond coupons involve default risk, which is related to the issuer's inability to meet payment obligations. Lastly, the risk of default by the bond issuer directly affects the likelihood of receiving any cash flows at all, rather than addressing the reinvestment of those cash flows once received. Thus, option A accurately captures the essence of reinvestment risk in the context of fixed-income securities.