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Question

Difficulty: EasyNon-Systematic and Credit Risks

A financial advisor explains to a client that holding a corporate bond exposes them to the specific possibility that the issuing company may default on scheduled interest or principal payments. Which type of risk is the advisor describing?

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

Answer

Credit risk is the risk that a specific security issuer will default on its obligation to make timely interest or principal payments.
Credit risk (or default risk) measures the likelihood that a debt issuer will fail to fulfill its obligation to pay interest or principal to bondholders on time.

Step-by-Step Solution

1
Identify the core scenario described in the prompt.
The prompt describes the potential default of a specific corporate bond issuer on its debt obligations.
Understanding the nature of the risk event (issuer financial default) helps distinguish non-systematic risks from systematic market forces.
2
Classify the risk type.
Failure to pay principal or interest is defined specifically as Credit (or Default) Risk.
Credit risk focuses directly on an issuer's financial strength and ability to fulfill debt terms.

Key Concept

Credit Risk (Default Risk)
Estimated Time:45s
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Topics

Non-Systematic and Credit Risks

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