SIE practice questionmediumBonds — Reinvestment Risk
Reinvestment risk is GREATEST for which type of bond?
- AA short-term Treasury bill
- BA floating-rate note
- CA high-coupon callable bond in a declining interest rate environment✓ Correct answer
- DA zero-coupon bond held to maturity
Explanation
Why C — A high-coupon callable bond in a declining interest rate environment
A high-coupon callable bond in a declining rate environment has the greatest reinvestment risk. The issuer is likely to call the bond, forcing the investor to reinvest the returned principal at lower rates. High coupons also mean more cash flows to reinvest at potentially lower rates. Zero-coupon bonds (A) have zero reinvestment risk because there are no periodic payments to reinvest.
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