What is reinvestment risk in the context of fixed-income securities held by debt funds?
A
The risk of the issuer defaulting on interest payments
B
The risk that interest rates prevailing on coupon payment or maturity dates may differ from the original coupon of the bond
C
The risk of a downgrade in the credit rating of the security
D
The risk of the security becoming illiquid
Correct Option:
B
Explanation
Reinvestment risk is the risk that coupon payments or principal received at maturity will have to be reinvested at interest rates lower or higher than the original coupon rate, potentially affecting the investor's expected return.
