Question

The risk that interest rate will decrease and thus hurt bondholder is called .....

A) Unsystematic risk

B) Default risk

C) Interest rate risk

D)Reinvestment rate risk

E) Portfolio risk

Answer 1

Option 'D' is correct

Reinvestment risk

The risk that a decline in interest rate will result in a lowering of your income from a bond portfolio. where as increase in interest rates hurts bondholders because it leads to a decline in the current value of a bond portfolio but also a decrease in interest rates can also hurt bondholders because if interest rate fall, long term investors will suffer a reduction in income.

Reinvestment risk is high on the callable bonds and the short term bonds