Sources of risk to investors who purchase federal government bonds include
1)reinvestment rate risk
2)risk of default
3)interest rate risk

Question

Quizplus · Accepted Answer

Reinvestment rate risk refers to the risk that the investor will not be able to reinvest the coupon payments at the same or higher rate as the original bond. This risk is inherent in all fixed-income securities, including federal government bonds. Interest rate risk arises from changes in interest rates, which can affect the value of the bond. As interest rates rise, the value of existing bonds decreases, and vice versa. However, federal government bonds are considered to be relatively low-risk investments, and the risk of default is very low. Therefore, the only sources of risk for investors in federal government bonds are reinvestment rate risk and interest rate risk.

Sources of Risk to Investors Who Purchase Federal Government Bonds