The problem in stretching out the maturity of marketable securities is that
A) you are legally locked in until the maturity date.
B) longer-term securities always make less interest than shorter-term securities.
C) there is a greater possibility that the value of the security will drop because of interest rate fluctuations.
D) interest rates are generally lower over time.

Question

Quizplus · Accepted Answer

Stretching out the maturity of marketable securities increases the risk of interest rate fluctuations, which can lead to a drop in the value of the security. This is because longer-term securities are more sensitive to interest rate changes than shorter-term securities. As a result, investors may end up losing money if interest rates rise and they need to sell their securities prior to maturity. Thus, option C is the correct answer.

The Problem in Stretching Out the Maturity of Marketable Securities