Products & Their RisksQuestion 54 of 398
An investor buys a short-term bond and, when it matures, can only reinvest the proceeds at a lower interest rate than before. This describes:
a.Call risk
b.Reinvestment risk
c.Credit risk
d.Currency risk
Explanation
Reinvestment risk is the danger that maturing principal or coupon payments must be reinvested at lower prevailing rates, reducing future income. It differs from call risk (early redemption), credit risk (default), and currency risk (exchange rates).
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