SIE (Securities Industry Essentials) Practice Exam

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What type of risk is highlighted by Jalen's fear of inflation impacting his bond with a 5% coupon rate?

Credit Risk
Purchasing Power Risk
Interest Rate Risk
Reinvestment Risk

The correct answer is: Purchasing Power Risk

This type of risk is known as purchasing power risk. It refers to the risk that the inflation rate will increase, causing a decrease in the purchasing power of the bond's future cash flows. Option A, credit risk, refers to the risk of default by the bond issuer. Option C, interest rate risk, refers to the risk of a change in interest rates affecting the bond's value. Option D, reinvestment risk, refers to the risk of not being able to reinvest the bond's future cash flows at the same rate of return when the bond matures.