Products & Their RisksQuestion 171 of 398
Call risk is the danger that:
a.An issuer will redeem a bond before maturity, usually when interest rates have fallen
b.An issuer will default on the bond
c.Inflation will erode the bond's value
d.The investor cannot find a buyer for the bond
Explanation
Call risk arises when a bond is callable, letting the issuer redeem it early. Issuers most often call bonds after interest rates have dropped, so they can refinance at lower rates. The investor then loses the higher-coupon bond and must reinvest at lower prevailing rates, which links call risk closely to reinvestment risk.
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