The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.
A) low, short
B) low, long
C) high, short
D) high, long
E) zero, very long

Question

Quizplus · Accepted Answer

The reinvestment assumption is the assumption that coupon payments will be reinvested at the same rate as the bond's yield to maturity. This assumption becomes more important with higher coupon payments, as there is more money to be reinvested, and with longer terms to maturity, as there is more time for interest to compound. Therefore, a high coupon and a long term to maturity would require a more accurate and precise reinvestment assumption.

The Importance of the Reinvestment Assumption Increases with a ____