Question: What do you mean by interest-on-interest?
Answer: Cash-flows received from a bond are usually reinvested. And the additional income from this reinvestment, is called interest-on-interest.
Question: How do you explain re-investment risk?
Answer: Cash-flows received from a bond are usually reinvested. And the additional income from this reinvestment, is called interest-on-interest. And returned received from reinvestment, depend on the strategy, and which changes as per market rate, and variability in returns s is called reinvestment risk. Therefore, the risk is that the interest rate on which interim cash-flows can be reinvested will fall. Reinvestment risk is higher for longer holding periods. This is also greater for securities with large, early cash-flows for example high-coupon bonds.
Question: How does interest-rate and re-investment risk are related?
Answer: Interest-rate risk and reinvestment risk are opposite to each other. For example, interest-rate risk is the risk that interest rates will rise, which causes price of a fixed income security to be reduced. On the other hand, reinvestment risk is the risk that interest rates will fall.
Question: Can you give one of the way, by which issuer/borrower can refinance the bond or issue?
Answer: As we know bonds may contain a provision by which it allows the issuer/borrower to retire, or “call,� all or part of the issue before the maturity date. With this provision, the issuer retains the right to refinance the bond in the future if market interest rates decline below the coupon rate.