If interest rates fall, what risk are bonds subject to when they are nearing maturity?

When interest rates fall, the risk that bonds are particularly subject to as they near maturity is reinvestment risk. This risk arises from the possibility that when the bond matures or makes periodic interest payments, the investor may have to reinvest the returned principal or coupon payments at a lower interest rate than the original investment. This can lead to reduced income from reinvestments if market rates are lower at the time the funds are available for reinvestment.

Bonds, as they approach maturity, become less sensitive to changes in interest rates because there is less time for fluctuating rates to impact their value. However, the concern is not about their initial yield but about the returns on reinvested funds. Consequently, if interest rates decrease, the new investments may yield a less favorable return compared to what the bond initially provided, hence exposing the investor to reinvestment risk. This makes it critical for bond investors to consider the interest rate environment as their bonds mature.