Examkin

Question

Difficulty: EasyNon-Systematic and Credit Risks

An investor holds corporate bonds issued by a commercial manufacturing company. If the issuing firm suffers severe financial losses and fails to make a scheduled coupon payment to bondholders, which risk has materialized?

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

Answer

Credit risk materialized because the corporate issuer failed to meet its contractual obligation to pay scheduled interest to bondholders.
Credit risk, or default risk, specifically measures the likelihood that a borrower or debt issuer will be financially unable to make timely interest or principal payments.

Step-by-Step Solution

1
Identify the event described in the question stem.
The corporate bond issuer suffered financial distress and defaulted on a scheduled coupon payment.
Failing to pay principal or interest when due is the definition of default.
2
Match the event to the corresponding category of risk.
The failure of a specific debt issuer to meet financial commitments represents credit (default) risk.
Credit risk measures an issuer's financial capability to service its debt obligations.

Key Concept

Credit risk (default risk) is a non-systematic risk specific to a debt security's issuer failing to pay principal or interest.
Estimated Time:45s
Rate this question

Topics

Non-Systematic and Credit Risks

More questions from this topic