An investor holds a portfolio heavily concentrated in senior unsecured debentures issued by a single industrial manufacturing corporation. A financial advisor is explaining the non-systematic and credit risk factors associated with this holding. Which of the following statements regarding these risks are correct?
- Credit risk represents the possibility that the issuing corporation will fail to make scheduled interest or principal payments.Cevap
- Holding US Treasury securities eliminates credit risk, but systematic market risk cannot be removed through issuer diversification.Cevap
- CThe primary risk caused by broad changes in Federal Reserve monetary policy is classified as a business risk specific to the issuer.
- DDiversifying into bonds issued by competing companies within the exact same industry eliminates all non-systematic business risks.
Cevap
Credit risk represents the possibility that the issuing corporation will fail to make scheduled interest or principal payments, and holding US Treasury securities eliminates credit risk while systematic market risk cannot be removed through issuer diversification.
Credit risk specifically describes default risk—the danger that an issuer cannot fulfill debt service obligations. Furthermore, non-systematic risk (such as credit risk) can be mitigated by diversification or selecting risk-free government issuers, whereas systematic market risks remain.
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Non-Systematic vs. Systematic Risk Characteristics and Credit Risk Mitigation