SIE practice questionmediumInflation/purchasing power risk
An investor holds a long-term Treasury bond that pays a fixed coupon. If inflation rises significantly, which risk does the investor most directly face?
- AConcentration risk
- BReinvestment risk
- CInflation (purchasing power) risk✓ Correct answer
- DLiquidity risk
Explanation
Why C — Inflation (purchasing power) risk
Inflation risk is the risk that rising prices erode the real value of fixed payments. Reinvestment risk concerns the rate for reinvested cash flows, liquidity risk is about ease of selling, and concentration risk relates to lack of diversification.
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