The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.
A) Low, short
B) Low, long
C) High, short
D) High, long
E) Zero, very long

Question

Quizplus · Accepted Answer

The reinvestment assumption refers to the assumption that coupon payments received from a bond will be reinvested at a certain rate. The higher the coupon rate, the more important this assumption becomes because there are more coupon payments to be reinvested. Similarly, the longer the term to maturity, the more important the reinvestment assumption becomes because there are more opportunities for the reinvested funds to compound over time. Therefore, the best choice is D, high coupon and long term to maturity.

The Importance of the Reinvestment Assumption Increases with a ____