Select the true statement about reinvestment risk. A) A smart investor can eliminate reinvestment risk in addition to interest rate risk.

Select the true statement about reinvestment risk.

A) A smart investor can eliminate reinvestment risk in addition to interest rate risk.

B) Reinvestment risk is inversely related to interest rate risk.

C) Callable bonds are less exposed to reinvestment risk.

D) It is the risk that a bond’s price will fall below its par value.

Answer: C) Callable bonds are less exposed to reinvestment risk.

Another possible risk is reinvestment risk, that is, retraction of cash inflows from future investments which then can be reinvested at a low rate. Callable bonds carry with it the face value of reinvestment risk, thus, the issuer has a way to call (redeem) a bond if interest rate goes lower before the maturity date. Scenario like this implies that the investor would carry out the transaction to receive the principal amount, simultaneously must refind it again among the low-interest rates today for the lowest yield. Unredeemable bonds, on the other hand, hold reinvestment risk at a lower degree given that issuers cannot release their bonds before maturity, and the investor can continue holding the bond until the end and reinvest the principal at a (potentially) higher interest rate in the future.