Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Reinvestment rate risk arises when the investor is uncertain about the rate at which cash flows received from a bond investment can be reinvested. For long-term bonds, investors can more easily predict the interest rate environment over a longer period, allowing for a potentially lower reinvestment rate risk. Therefore, statement B is correct.

A) Statement A is incorrect. Typically, short-term bonds have lower default risk than long-term bonds. 
C) Statement C is incorrect. The market segmentation theory does not make any specific predictions about the shape of the yield curve. 
D) Statement D is incorrect. The yield curve can be upward or downward sloping depending on market expectations and other factors. Borrower preferences for short-term debt are not the only factor affecting the shape of the yield curve. 
E) Statement E is incorrect. If inflation were expected to decrease, then the yield curve may actually flatten or even invert if investors expect the central bank to lower interest rates in response to lower inflation.

Which of the Following Statements Is Correct