Question
Which of the following is correct regarding Reinvestment
Risk? i. When Interest Rate at which the future cash flows can be reinvested are uncertain it is called Reinvestment Risk ii. Any mismatch in cash flows will expose a Bank iii. Since the market interest rates move in different directions, it will have variation in net interest incomeSolution
Reinvestment risk is the uncertainty with regard to interest rate at which the future cash flows could be reinvested. Any mismatches in cash flows would expose the banks to variations in NII as the market interest rates move in different directions.
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