Many financial institutions rely heavily on debt to fund their operations, and they are interconnected by virtue of financing each other's debt positions. Therefore, if one institution cannot pay its debts, it may create cash flow problems for several other institutions. The risk created by this situation is known as ________.(a)- credit risk
(b)- systemic risk
(c)- inflation risk
(d)- horizon risk

Question

23-03-2020
Business

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Many financial institutions rely heavily on debt to fund their operations, and they are interconnected by virtue of financing each other's debt positions. Therefore, if one institution cannot pay its debts, it may create cash flow problems for several other institutions. The risk created by this situation is known as ________.(a)- credit risk
(b)- systemic risk
(c)- inflation risk
(d)- horizon risk

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Answer

(A) Credit Risk

Explanation

Credit risk is the risk that the borrower of funds may default on the payments of the funds borrowed.

Systematic Risk which is also known as the ''market risk'' or the ''unverifiable risk'' is the risk related to the entire market or a amrket segment.

Inflation risk also know as ''purchasing power risk'' is the risk that future cash flows would lose there real value due to changes in purchasing power due to inflation.

Horizon risk means that your investments maturity may be shortened due to an unforeseen event. This might force you to sell your expected longterm investments.