The Dillinger State Bank has purchased a bond issued by the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%.Market interest rates have recently declined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate.What type of risk is the Dillinger State Bank worried about?

Question

Quizplus · Accepted Answer

The Dillinger State Bank is worried about call risk, which is the risk that a bond issuer will retire a bond before its maturity date and reissue new bonds at a lower interest rate when market interest rates decline.

The Dillinger State Bank Has Purchased a Bond Issued by the Interstate