Match each specific category of non-systematic or credit risk to the corporate investor scenario that most accurately demonstrates its impact.
- Business RiskA manufacturing firm suffers a steep drop in operating income following a major product recall and loss of market share, independent of its debt levels.
- Financial RiskA corporation carrying an exceptionally high debt-to-equity ratio experiences severe cash flow strain when servicing fixed debt interest during an industry slowdown.
- Credit (Default) RiskA corporate debenture issuer fails to make a scheduled semi-annual coupon payment, leading rating agencies to downgrade the debt to default status.
- Liquidity RiskAn institutional investor holding an unrated, specialized municipal issue struggles to find an active buyer in the secondary market without taking a large price concession.
Answer
Business Risk matches the scenario involving operating income loss from product recall; Financial Risk matches the highly leveraged firm struggling with fixed interest obligations; Credit (Default) Risk matches the issuer missing scheduled coupon payments; Liquidity Risk matches the difficulty selling an unrated municipal security without a steep price discount.
Each risk category directly matches its operational definition: Business risk reflects operational disruption (product recall), financial risk reflects excessive leverage obligations, credit risk reflects contractual payment default, and liquidity risk reflects secondary market trading difficulty.
Step-by-Step Solution
Key Concept
Categorization of Non-Systematic and Credit Risks
Estimated Time:1m 30s