Question

Which of the following risks is associated with the degree of recovery if default occurs? Group...

Which of the following risks is associated with the degree of recovery if default occurs?

Group of answer choices

a. Liquidity risk.

b. Credit risk.

c. Reinvestment risk.

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Answer #1

Answer: Credit risk

Explanation:

Liquidity risk:
Refers to the risk that a firm will not be able to meet its short term financial obligations as they fall due.
Credit risk:
Refers to the risk of default on a debt, this risk comes up when a borrower fails to make the required payments to the lender.
Reinvestment risk:
It refers to a probability that an investor will not be able to reinvest the cash flows (such as coupon payments from bonds) at a rate that is equivalent to the current rate of return of the investment.

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