Answer to Question #224766 in Economics for The President

Question

A company's sources of long-term funds include bonds, preferred stock and common stock. Identify some financing risks associated with these sources and explain how these risks affect the return expected from investments financed by these sources.

Answer 1

Market risk is the risk of a decline in the value of assets. This can happen for various reasons, for example, due to the devaluation of the ruble or the bankruptcy of the issuer.

Liquidity risk - the risk that the management company will not be able to sell or buy securities if there are no offers on the market.

Credit risk is the risk of default on bonds or the risk that the partners of the management company will not be able to fulfill their obligations.

Legal risk is the risks associated with regulatory documents, changes in tax rates and benefits, risks of sanctions.

Operational risk is associated with disruptions in the operation of the management company and the exchange.

Risks associated with asset management are the risks that the manager will choose unprofitable securities, will not rebalance the portfolio in time, or will choose the wrong time to buy or sell an asset.