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 income
    A Only (i) and (ii) Correct Answer Incorrect Answer
    B Only (i) and (iii) Correct Answer Incorrect Answer
    C Only (ii) and (iii) Correct Answer Incorrect Answer
    D Only (i) Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    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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