Match each specific risk factor associated with individual security issuers to the corporate event or financial circumstance that best exemplifies it.
- Default (Credit) RiskA corporate bond issuer experiences severe cash flow shortfalls, leading to uncertainty over its ability to make upcoming scheduled coupon payments.
- Business RiskA biotechnology firm suffers a sharp drop in revenue after its primary drug candidate fails to receive anticipated FDA approval.
- Regulatory RiskA manufacturing company faces unexpected compliance costs and operational limits following a newly enacted environmental emissions law.
- Liquidity RiskAn investor holding a thinly traded municipal revenue bond cannot quickly convert the security to cash without accepting a deep price discount.
Answer
Default (Credit) Risk matches the scenario regarding cash flow shortfalls and missed coupon payments; Business Risk matches the scenario regarding the failed drug candidate approval; Regulatory Risk matches the scenario regarding newly enacted environmental laws; Liquidity Risk matches the scenario regarding a thinly traded bond that cannot be quickly sold without a steep discount.
Non-systematic risks affect specific companies or industries and can be mitigated through portfolio diversification. Default (credit) risk specifically relates to the issuer's inability to service debt obligations; business risk relates to commercial or operational performance setbacks; regulatory risk reflects losses caused by changes in law or policy; and liquidity risk reflects the difficulty of executing secondary market transactions quickly without price concession.
Step-by-Step Solution
Key Concept
Non-Systematic and Credit Risks