SIE practice questionmediumCall risk/Prepayment risk
Which risk do investors in callable bonds primarily face if interest rates fall sharply?
- AConcentration risk
- BLiquidity risk
- CCall risk✓ Correct answer
- DBusiness risk
Explanation
Why C — Call risk
Call risk is the risk that a bond issuer will repay the bond before maturity, often when interest rates fall, forcing the investor to reinvest at lower yields. Concentration risk is about undiversified holdings, liquidity risk is about ease of selling, and business risk is about issuer performance.
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