SIE practice questionmediumCall risk
Why is call risk a disadvantage for investors in callable bonds?
- AIt guarantees higher returns
- BIt may force reinvestment at lower rates✓ Correct answer
- CIt increases bond duration
- DIt causes the issuer to default
Explanation
Why B — It may force reinvestment at lower rates
If called, investors may have to reinvest at lower prevailing rates. It does not guarantee higher returns, increase duration, or cause default.
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