For bonds, which of the following is NOT the key component of market risk?

Question

Options

• AInterest rate risk
• BCall risk
• CLiquidity risk
• DInvestment risk

• A
  10% (3)
• B
  3% (1)
• C
  3% (1)
• D
  84% (26)

Explanation

Investment risk (D) is not a recognized component of bond market risk because it is an overly broad, general term - not a distinct, named risk category used in fixed-income analysis. Bond market risk is defined by specific, identifiable sources of price or value change.

Why the distractors are actually correct components:

• A (Interest rate risk): The primary driver of bond price volatility - when rates rise, bond prices fall, and vice versa.
• B (Call risk): The danger that an issuer redeems a callable bond early, usually when rates drop, forcing investors to reinvest at lower yields.
• C (Liquidity risk): The risk of being unable to sell a bond quickly at a fair price, which directly affects its market value.

Memory tip: Use the acronym ICL - Interest rate, Call, Liquidity - as the three named pillars of bond market risk. Any answer that sounds vague or generic (like "investment risk") is a distractor, because market risk components must point to a specific mechanism that moves a bond's price.

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