Your client has an investment bond paying a coupon rate of 5 percent, but inflation increased to 5.5 percent. What type of risk does the scenario represent?

Question

Quizplus · Accepted Answer

A client with an investment bond paying a coupon rate of 5 percent with inflation increased 5.5 percent is experiencing a purchasing power risk. Purchasing power risk is often called inflation risk; it arises from variations in cash flows from a security because of inflation, which reduces the purchasing power of money. The difference between the client's 5 percent and inflation's 5.5 percent is declined the money's value.

Your Client Has an Investment Bond Paying a Coupon Rate