SIE practice questioneasyReinvestment risk
An investor holding a callable bond is worried that if interest rates fall, coupons or principal may be returned early and reinvested at lower rates. Which risk does this describe?
- AMarket risk
- BReinvestment risk✓ Correct answer
- CCredit risk
- DConcentration risk
Explanation
Why B — Reinvestment risk
Reinvestment risk refers to the risk of having to reinvest at lower rates when interest income or principal is returned. The other risks do not specifically address this scenario.
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