Question

select the true statement about reinvestment risk.

callable bonds are less exposed to reinvestment risk.

it is the risk that a bonds price will fall below its par value.

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

reinvestment risk is inversely related to interest rate risk

Explanation:

1. Analyze each option:

• Option 1: Callable bonds are more exposed to reinvestment risk (issuer may call when rates drop, forcing reinvestment at lower rates), so this is false.
• Option 2: The risk of a bond's price falling below par is interest rate risk (price - yield inverse), not reinvestment risk. Reinvestment risk is about reinvesting coupons/ principal at lower rates. So this is false.
• Option 3: Reinvestment risk and interest rate risk (and other risks) can't be fully eliminated by an investor (e.g., market - driven rate changes), so this is false.
• Option 4: Reinvestment risk and interest rate risk are inversely related. When interest rates fall, reinvestment risk rises (coupons reinvested at lower rates), and interest rate risk (price risk) also rises? Wait, no—wait, when rates fall, bond prices rise (interest rate risk: price risk is about price change; reinvestment risk is about reinvesting cash flows at lower rates). Wait, actually, when interest rates decrease, reinvestment risk increases (because you have to reinvest coupons at lower rates), and interest rate risk (price risk) also increases (bond prices rise). But the last option (partially visible) says "Reinvestment risk is inversely related to interest rate risk"—wait, maybe the full option is "Reinvestment risk is inversely related to interest rate risk"—when rates go up, reinvestment risk decreases (you can reinvest at higher rates), and interest rate risk (price risk) increases (bond prices fall). So they are inversely related. So this statement is true.

Answer:

The option "Reinvestment risk is inversely related to interest rate risk" (the last option, assuming the full statement is as such).