SIE practice questioneasyCredit/default risk
A bondholder is worried that a company may not make its interest or principal payments as promised. This concern is best described as:
- AInterest rate risk
- BDefault risk✓ Correct answer
- CReinvestment risk
- DPrepayment risk
Explanation
Why B — Default risk
Default (credit) risk is the chance a borrower fails to make interest or principal payments. Interest rate risk concerns changes in market rates, reinvestment risk involves receiving lower yields on reinvested proceeds, and prepayment risk is primarily associated with mortgage-backed securities.
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