Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Reinvestment rate risk refers to the risk that future cash flows from an investment will have to be reinvested at a lower interest rate than the current rate. Since long-term bonds have a longer maturity, investors would have more opportunities to reinvest the cash flows at current prevailing interest rates, thus reducing the reinvestment rate risk. Therefore, statement D is correct. 
Statement A is incorrect because if interest rates are expected to decrease in the future, the yield curve would have a downward slope, not an upward slope. 
Statement B is incorrect because liquidity premiums are generally higher on corporate bonds, not government bonds. 
Statement C is incorrect because default risk premiums are generally higher on corporate bonds, not lower.

Which of the Following Statements Is Correct