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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Which of the following best describes reinvestment risk in a fixed income investment?

Reinvestment risk is the risk that coupons or other interim cash flows have to be reinvested at lower interest rates than the bond's original yield. This reduces the realised return, and it differs from default, price and liquidity risks.

  1. ARisk that coupons received must be reinvested at lower rates than the original yieldCorrect
  2. BRisk that the issuer fails to pay the principal on maturity
  3. CRisk that the bond price falls when interest rates rise
  4. DRisk that the bond cannot be sold quickly in the market

Explanation

Reinvestment risk arises when interim cash flows such as coupons are reinvested at lower prevailing rates, reducing the realised return. Default risk concerns non-payment, interest rate (price) risk concerns price falls, and liquidity risk concerns difficulty in selling.

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