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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)

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

Reinvestment risk is the risk that coupons or other interim cash flows received from a bond must be reinvested at lower interest rates than the bond's original yield. It usually arises when market rates fall during the holding period.

  1. AThe risk that the issuer fails to pay the principal
  2. BThe risk that coupons received must be reinvested at lower rates than the original yieldCorrect
  3. CThe risk that the bond price falls because of rising yields before maturity
  4. DThe risk that the bond is difficult to sell in the market

Explanation

Reinvestment risk arises when interim cash flows such as coupons are reinvested at lower rates than the bond's original yield, typically when rates fall. Option one is credit risk, option three is price (interest rate) risk, and option four is liquidity risk.

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