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Question

Difficulty: EasyNon-Systematic and Credit Risks

An investor purchases senior debt securities issued by a national logistics corporation. If the corporation suffers severe financial distress and fails to make its scheduled interest payments to bondholders, which of the following risks has directly materialized?

  1. Credit riskAnswer
  2. B
    Interest rate risk
  3. C
    Purchasing power risk
  4. D
    Market risk

Answer

Credit risk
Credit risk (or default risk) is a non-systematic risk defined as the possibility that a bond issuer will default on its obligation to pay interest or repay principal when due.

Step-by-Step Solution

1
Identify the event described in the scenario
The corporate issuer failed to meet its contractual obligation of making interest payments.
Recognizing the cause of financial loss is key to selecting the correct risk category.
2
Classify the specific risk type associated with issuer non-payment
Failure to pay interest or principal on debt securities represents credit (default) risk.
Credit risk specifically measures the likelihood of an issuer default.

Key Concept

Credit (Default) Risk
Estimated Time:45s
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Topics

Non-Systematic and Credit Risks

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