CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Which of the following are negatively related to reinvestment risk?

A. Term to maturity
B. Coupon rate
C. Yield to maturity
D. None of the above
Correct Answer: D

Reinvestment risk is defined as the risk that the cash flows produced by a debt security will not be able to be reinvested at as high a yield as the debt security that created them. This type of risk is positively related to several factors, including yield to maturity, frequency of interest and principal repayments, and the term to maturity. For example, long-term bonds expose investors to more reinvestment risk than short-term bonds, holding everything equal. Conversely, bonds with high YTM expose investors to more reinvestment risk than bonds with low YTM, holding everything else equal. Another factor to consider in evaluating the reinvestment risk of a debt security is the frequency of cash flows produced by the security. For example, GNMA pass-through certificates pay monthly and force investors to reinvest these monthly proceeds at the YTM in order to maintain the optimal yield. GNMA pass-through certificates are amortizing securities, i.e., the cash flows produced by them are comprised of both interest and principal repayment. Amortizing securities repay principal gradually, and thus expose investors to more reinvestment risk than a debt security that pays its principal in full at maturity.

User Contributed Comments 4

User Comment
kodali Why not B zero coupon bonds have no re-investment risk
smillis Zero coupon bonds have low (zero) coupon rate = low (zero) reinvestment rate -- positively correlated. The ? asks for inverse correlation.
magicchip Term to maturity is inversely correlated to reinvestment risk.
rhardin Magicchip, that's wrong. The longer the term to maturity, the more reinvestment risk. Positive correlation.
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