Canadian Securities Course (CSC) Level 1 Practice Exam

Which factor poses a risk to the overall return of bond coupons?

1. Inflation rates exceeding purchase expectations

2. Stable long-term interest rates

3. Fluctuating bond prices

4. Consistent coupon and purchase rates

The correct answer is: Inflation rates exceeding purchase expectations

Inflation rates exceeding purchase expectations pose a risk to the overall return of bond coupons because when inflation rates are higher than anticipated at the time of purchasing the bond, the purchasing power of the fixed coupon payments decreases. This means that the real return on the bond is lower than expected, leading to a decrease in the overall return for the bondholder. On the other hand, stable long-term interest rates, fluctuating bond prices, and consistent coupon and purchase rates do not directly affect the real return of bond coupons like inflation rates exceeding purchase expectations do.