Which of the following statements is CORRECT?
A) 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.
B) Reinvestment rate risk is lower,other things held constant,on long-term than on short-term bonds.
C) The pure expectations theory of the term structure states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis,and as a result,the yield curve is normally upward sloping.
D) 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.
E) Liquidity premiums are generally higher on Treasury than on corporate bonds.

Question

Quizplus · Accepted Answer

Reinvestment rate risk is indeed lower for long-term bonds compared to short-term bonds because with long-term bonds, investors lock in the interest rate for a longer period, reducing the risk associated with having to reinvest at potentially lower rates in the future.

Which of the Following Statements Is CORRECT