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

Which risk refers to the possibility that coupons received from a bond may have to be reinvested at a lower rate than the original yield?

This is reinvestment risk. When interest rates fall, coupons and maturity proceeds received from a bond must be reinvested at lower rates than the original yield, reducing the overall realised return. It differs from credit risk, which concerns issuer default, and liquidity risk.

  1. ACredit risk
  2. BLiquidity risk
  3. CReinvestment riskCorrect
  4. DCall risk only

Explanation

Reinvestment risk is the risk that interim cash flows such as coupons are reinvested at lower prevailing rates. Credit risk concerns issuer default and liquidity risk concerns difficulty in selling without price impact.

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