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Zorluk: OrtaNon-Systematic and Credit Risks

An investor holds a portfolio of revenue bonds issued by a municipal port authority to fund the construction of a container terminal. Following the opening of a competing regional deep-water port, the terminal experiences a significant, unforeseen reduction in cargo traffic and revenue, causing credit rating agencies to downgrade the bonds from investment grade to speculative grade. Which of the following risks is primarily demonstrated in this scenario, and how can an investor best mitigate it in the future?

  1. Credit (default) risk, which can be effectively mitigated through portfolio diversification across different issuers and sectors.Cevap
  2. B
    Interest rate risk, which can be effectively mitigated by purchasing longer-term fixed-rate municipal bonds.
  3. C
    Market (systematic) risk, which can be effectively eliminated by allocating funds across various project revenue bonds.
  4. D
    Liquidity risk, which can be effectively mitigated by holding bonds until their final maturity date.

Cevap

The scenario demonstrates credit (default) risk, which is a non-systematic risk specific to the issuer and can be mitigated through asset diversification.
The decline in cargo revenues due to local competition specifically impairs the municipal authority's capacity to pay debt service, resulting in a downgrade. This issuer-specific vulnerability is credit (default) risk. Because credit risk is a non-systematic risk, investors can manage and reduce its impact by diversifying their holdings across different bond issuers, geographic areas, and security types.

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1
Identify the specific risk type affecting the bond issuer.
The loss of revenue due to a competing facility threatens the issuer's ability to meet interest and principal payment obligations, which causes a rating downgrade. This is credit (default) risk.
Credit risk represents the risk that an issuer may default or suffer a credit rating downgrade due to financial or operational difficulties.
2
Classify the risk as systematic or non-systematic.
Because the drop in cargo traffic is specific to this single port facility and not a market-wide economic collapse, it is a non-systematic (unsystematic) risk.
Non-systematic risks are company- or project-specific and do not impact the broader financial markets simultaneously.
3
Determine the appropriate risk mitigation strategy.
Non-systematic risks can be substantially reduced or mitigated by diversifying investments across multiple issuers, industries, and geographic regions.
Diversification spreads capital so that negative events impacting one issuer do not severely impair the entire portfolio.

Anahtar Kavram

Non-Systematic Risk and Credit Risk Mitigation
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Konular

Non-Systematic and Credit Risks

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