Canadian Securities Course (CSC) Practice Exam

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What is the definition of reinvestment risk in investing?

  1. the risk of market volatility affecting profits

  2. the risk of losing money due to fraud

  3. the risk that the coupons cannot be reinvested at the same interest rate that prevailed at the time of purchase

  4. the risk of a company going bankrupt

The correct answer is: the risk that the coupons cannot be reinvested at the same interest rate that prevailed at the time of purchase

Reinvestment risk in investing refers to the potential risk of not being able to reinvest coupons at the same interest rate at the time of purchase. This means that an investment may have a high initial interest rate, but when the investment matures and the coupons are reinvested, the interest rate may be lower, resulting in lower returns. Option A is incorrect because it references market volatility, which is a different concept. Option B is incorrect because it mentions the risk of fraud, which is not specific to reinvestment risk. Option D is incorrect because it refers to the risk of a single company going bankrupt, which is not related to the broader concept of reinvestment risk. Therefore, the most accurate definition for reinvestment risk in investing is option C.

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