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The risk an investor is most likely to face when investing in a discounted U.S. Treasury bond is:

a. Call risk

b.
Reinvestment risk


c. Credit risk

d. Purchasing power risk





Answer: B

because call risk would apply more often to a bond purchased at a premium rather than a discount, and a bond issued by the U.S. Treasury has the lowest credit risk. While purchasing power risk is a possibility, reinvestment risk is the risk the investor is most likely to face. Since the bond was bought at a discount, it would be difficult to get a similar return on reinvesting dividends if purchasing bonds at par.


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