Question

Rashid has been purchasing bonds from a company that has recently gotten poor ratings for its ability to pay Its vendors. As a resu
Increased risk, the bond's interest rate has increased. What type of risk does Rashid face as an Investor?

A

taxability risk

• B.

Inflationary risk

C.

currency risk

D.

credit risk

Answer 1

Answer:

The answer is letter D, credit risk.

Step-by-step explanation:

A bond is considered to be a contract between two occurring parties. It allows companies to borrow money from people (investors). These investors purchase the bond and are given a certain interest for a particular period of time. The rate varies according to the economic situation or the company's standing. This affects the supply and demand for the bond.

Remember that the price of the bond and the interest rate are indirectly proportional. This means that as the price of the bond increases, the interest rate decreases and vice-versa.

In the situation above, Rashid is facing a credit risk as an investor. He has been purchasing bonds from a company that has recently gotten a poor rating. This means that the company is not performing well. This can affect the amount of money (including the interest) that will be paid back to Rashid. There is a chance that some of the amount of money he invested will not be returned to him. It was also mentioned that the bond's interest rate has increased. This means that the bond prices will decrease and thus the number of bond investors will also decrease. The issuer of the bond in this situation can have a hard time paying the investor back.