Question

The Dillinger State Bank has purchased a bond issued by the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recently declined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about?

A. Credit risk

B. Interest-rate risk

C. Business risk

D. Call risk

E. Inflation risk

Answer

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