SIE (Securities Industry Essentials) Practice Exam

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The risk that the issuer will require the bond owner to sell the bond back to the issuer at a specific date and price is referred to as:

Call risk
Interest rate risk
Credit risk
Market risk

The correct answer is: Call risk

This is known as call risk because the issuer, or the entity that issued the bond, has the option to "call" or redeem the bond before its maturity date. This can happen if interest rates fall, allowing the issuer to reissue the bond at a lower rate, resulting in lower borrowing costs. This can potentially be disadvantageous for the bond owner, as they may have to sell the bond back to the issuer at a specific date and price, instead of holding it until maturity and potentially earning higher returns. Option B, interest rate risk, refers to the risk that the value of the bond will decrease if interest rates rise. Option C, credit risk, is the risk that the bond issuer may default on their payments. Option D, market risk, is the risk associated with overall market fluctuations and how they may affect the value of the bond. While these risks are also important to consider when investing in bonds, they do not specifically refer to the issuer having the option to call back the bond. This is why option A, call risk, is the correct answer for this question.