Reykjavík is the most northerly capital city of a sovereign state.
Iceland’s capital stands at about 64°08′ north latitude on the island’s southwest coast. That places it farther north than Oslo, Stockholm, and Helsinki, the other options in this question. Reykjavík’s position makes it the northernmost national capital among independent countries, although it is not the northernmost capital of any political territory.
The important qualification is Greenland. Nuuk lies slightly farther north, around 64°10′ north, but Greenland is a constituent country within the Kingdom of Denmark rather than a sovereign state. Copenhagen is Denmark’s national capital, so Nuuk does not displace Reykjavík in the usual quiz formulation.
Reykjavík’s name comes from Old Norse roots meaning “smoke” and “bay,” inspired by steam rising from the area’s geothermal springs. Norse settlement is traditionally associated with Ingólfr Arnarson around AD 874, while the modern town was formally established as a trading settlement in 1786. Today it is Iceland’s largest city and the country’s centre of government, culture, and commerce.