If interest rates fall, a bond issuer may decide to pay off (or "retire") its debt and issue new bonds that pay a lower rate. When this happens, the fund may not be able to reinvest the proceeds in an investment with a high return or yield. This is an example of:

Question

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Prepayment risk occurs when a bond issuer pays off its debt early, often due to falling interest rates, which can lead to reinvestment at lower yields.

If Interest Rates Fall, a Bond Issuer May Decide to Pay