Products & Their RisksQuestion 49 of 398
When interest rates fall, an investor who owns a callable bond faces the risk that the bond will be called and the proceeds must be reinvested at lower rates. This combined concern is BEST described as:
a.Call risk (leading to reinvestment risk)
b.Purchasing-power risk
c.Credit risk
d.Currency risk
Explanation
When rates fall, issuers often call bonds to refinance cheaper, forcing the investor to reinvest the returned principal at the now-lower market rates, so call risk gives rise to reinvestment risk. This is unrelated to inflation, default, or exchange rates.
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