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Answer: Both market price risk and coupon reinvestment risk.
The correct answer is **C** because the investor faces two types of risks: 1. **Coupon reinvestment risk**: Changes in interest rates affect the future value of reinvested coupon payments, including the first coupon and any subsequent ones until the bond is sold. 2. **Market price risk**: The investor may sell the bond at a price higher or lower than expected due to fluctuations in interest rates. Coupon reinvestment risk is more significant for investors with a long-term horizon relative to the bond's maturity, while market price risk is more relevant for those with a short-term horizon. For example, a buy-and-hold investor is primarily exposed to coupon reinvestment risk, whereas an investor selling the bond before the first coupon is received faces only market price risk.
Author: LeetQuiz Editorial Team
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With respect to interest rate risk, an investor who sells a fixed-rate bond after the first coupon is received but before maturity is exposed to:
A
Market price risk exclusively.
B
Coupon reinvestment risk exclusively.
C
Both market price risk and coupon reinvestment risk.
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