An investor has a portfolio of bonds that yields 6%. Interest rates have been falling, leading the investor to seek new bonds at lower yields. This investor is experiencing:

The scenario describes an investor with a portfolio of bonds yielding 6% who is seeking new bonds at lower yields due to falling interest rates. This situation indicates that the investor is facing a type of risk related to the timing of cash flows on their existing investments.

The correct perspective here is associated with the concept of opportunity risk, which is the potential loss that an investor experiences by not engaging in new investment opportunities that could yield higher returns, typically due to market changes. When interest rates fall, existing bonds with higher yields become more valuable, and investors may find themselves losing out on potential gains if they are unable to reinvest their assets into similar or better yielding instruments at current rates.

In this case, while the investor is looking for new bonds that yield lower than the existing 6%, the correct risk is more aligned with opportunity risk because the falling interest rates limit the possibilities for reinvesting at favorable yields. As rates decline, if the investor sold their current bonds to purchase new ones at lower yields, they would miss out on maintaining their previous income level.

Understanding these concepts is critical in bond investment strategies, as they highlight how market trends can impact an investor's decisions and potential future income.