Price risk and reinvestment risk partly offset each other because when interest rates decline:
A)the bond records a capital gain but the gain is partly offset by lower coupon reinvestment income.
B)the bond suffers a capital loss but the loss is partly offset by higher coupon reinvestment income.
C)the bond records a capital gain but the gain is partly offset by higher coupon reinvestment income.
D)the bond suffers a capital loss but the loss is partly offset by lower coupon reinvestment income.

Question

Quizplus · Accepted Answer

When interest rates decline, bond prices increase, resulting in a capital gain. However, the reinvestment income from coupons will be lower due to the decreased interest rates, partially offsetting the gain.

Price Risk and Reinvestment Risk Partly Offset Each Other Because