SIE Exam Question 670: Answer and Explanation

Question: 670

Which of the following is/are correct regarding a bond's coupon rate?

(1) The smaller a bond's coupon, the greater its relative price fluctuation.

(2) The smaller a bond's coupon, the greater its reinvestment risk.

• A. (1) only
• B. (2) only
• C. Both (1) and (2) are correct.
• D. Neither (1) or (2) are correct.

Correct Answer: A

Explanation:

The smaller a bond's coupon, the greater its relative price fluctuation. The smaller a bond's coupon, the lower its reinvestment risk.