The price risk of a bond tends to offset reinvestment risk somewhat as market interest rates vary.

Question

Quizplus · Accepted Answer

When market interest rates rise, the price of existing bonds falls (price risk), but the interest payments can be reinvested at higher rates (reinvestment risk is mitigated). Conversely, when rates fall, bond prices increase (mitigating price risk), but reinvestment rates are lower (increasing reinvestment risk). Thus, the effects of price risk and reinvestment risk tend to offset each other to some extent.

The Price Risk of a Bond Tends to Offset Reinvestment