Which of the following statements is correct? Select one: a. The probability of

Question

Which of the following statements is correct? Select one: a. The probability of default is higher on short -term bonds than on long-term bonds. b. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. c. According to the market segmentation theory, the yield curve is expected to slope downward. d. Borrowers prefer to borrow on a short-term basis, as a result, the yield curve is downward sloping. e. If the inflation was expected to decrease in the future, then the yield curve would have an upward slope.

Explanation / Answer

Correct option is > d. Borrowers prefer to borrow on a short-term basis, as a result, the yield curve is downward sloping.

Short term borrowings are beneficial to borrowers if yield curve is downward slopping and generally borrowers prefer to borrow on short term basis and take advantage of falling yields or downward sloping yield curve.

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