The risk that coupon payments must be reinvested at lower market rates is known as what?

Reinvestment risk specifically refers to the uncertainty regarding the returns that an investor will receive from reinvesting coupon payments or income generated from an investment at prevailing market interest rates. When interest rates decline, the income received from coupon payments may need to be reinvested at lower rates, potentially leading to a decrease in overall investment returns. This is particularly relevant for fixed-income securities like bonds, where coupon payments represent a constant flow of income that can be reinvested.

In contrast, other types of risks outlined in the choices engage different facets of investment uncertainty. Liquidity risk pertains to the difficulty of selling an asset without impacting its price, while interest rate risk refers to the price sensitivity of a security to changes in interest rates, affecting its market value rather than the reinvestment of cash flows. Default risk, on the other hand, is the chance that a borrower will fail to make required payments on debt obligations. Each of these risks plays a significant role in investment decision-making, but reinvestment risk directly addresses the challenges associated with reinvesting cash flows at changing rates.