SIE Understanding Products and Their Risks Question 31: Answer and Explanation

Question: 31

Which of the following risks is most related to the successful operation of an issuer of a security?

• A. Currency risk
• B. Inflationary/purchasing power risk
• C. Credit risk
• D. Interest rate/reinvestment risk

Correct Answer: C

Explanation:

C: Credit risk is directly related to the ability of the security's issuer to operate successfully and fulfill its obligations. Currency risk, Choice A, is related to the change in relative value between two countries' currencies and may have no relationship to the business success of the company. Inflationary/purchasing power risk, Choice B, relates to inflation in the economy, and interest rate/reinvestment risk, Choice D, relates to the general level of interest rates. Neither choice relates to the business success of the issuer, so even if the issuer pays interest and principal as promised, the cash received may have declined in value in relation to the amount of goods and services it can buy.