Products & Their RisksQuestion 47 of 398
Credit (default) risk refers to the possibility that:
a.Interest rates in the market will rise
b.The investor will have to reinvest coupons at a lower rate
c.The issuer will fail to make timely interest or principal payments
d.Inflation will erode the purchasing power of the payments
Explanation
Credit or default risk is the chance that the bond issuer cannot make its promised interest or principal payments on time. Rising rates describe interest-rate risk, lower reinvestment rates describe reinvestment risk, and eroding purchasing power describes inflation risk.
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