Which of the following statements is CORRECT?
A) If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
B) Liquidity premiums are generally higher on Treasury than corporate bonds.
C) The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
D) Default risk premiums are generally lower on corporate than on Treasury bonds.
E) Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

Question

Quizplus · Accepted Answer

Reinvestment rate risk is the risk that invested cash flows will be reinvested at a lower rate. Long-term bonds have more cash flows, and therefore there is more opportunity for reinvestment risk. So, reinvestment rate risk is higher on long-term bonds than on short-term bonds.

Which of the Following Statements Is CORRECT