Products & Their RisksQuestion 169 of 398
An investor holding long-term fixed-rate bonds is most concerned about purchasing-power risk, which means:
a.The issuer may default before maturity
b.The bond may be called early
c.Inflation may erode the real value of the fixed interest payments over time
d.Exchange rates may move against the investor
Explanation
Purchasing-power (inflation) risk is the danger that rising prices will erode the real value of a bond's fixed coupon and principal. It is especially significant for long-term, fixed-rate bonds, where payments are locked in for many years. Investments like TIPS or equities are often used to help offset this risk.
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