Products & Their RisksQuestion 149 of 398
Reinvestment risk is greatest for an investor who:
a.Holds a zero-coupon Treasury STRIP to maturity
b.Receives regular coupon payments during a period of falling interest rates
c.Buys a stock that pays no dividend
d.Holds cash in a checking account
Explanation
Reinvestment risk is the danger that interest or principal received will have to be reinvested at a lower rate than the original investment. It is greatest for coupon-paying bonds when rates are falling, because each coupon must be reinvested at the new lower rate. Zero-coupon bonds like STRIPS have no interim payments to reinvest, so they avoid reinvestment risk if held to maturity.
Practice all 398 questions free — no signup required.
Related questions on this topic
- Legislative (regulatory) risk refers to the possibility that:
- Currency (exchange rate) risk is the risk that:
- Liquidity risk is the risk that an investor:
- An investor holding a 20-year municipal bond faces the greatest interest rate risk because:
- Credit (default) risk is best measured for a corporate bond by looking at its:
- An investor in the 32% federal tax bracket is comparing a municipal bond yielding 4% with a corporate bond. The taxable-equivalent yield of the muni is approximately:
Last reviewed: · editorial process
PrepPass Editorial Team · Verified against FINRA Securities Industry Essentials (SIE) Exam · How we review