SIE practice questionhardReinvestment risk
An investor in callable bonds is concerned about not being able to reinvest principal at similar rates if bonds are called. This risk is highest when:
- AInterest rates are stable
- BInterest rates rise
- CInterest rates fall✓ Correct answer
- DThe issuer's credit improves
Explanation
Why C — Interest rates fall
If interest rates fall, issuers are likely to call bonds and refinance, forcing investors to reinvest at lower rates. Rising or stable rates reduce this risk.
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