Credit risk and interest rate risk cannot affect insolvency risk.

Question

BlackTom AI · Accepted Answer

Restating the prompt and options: The statement to evaluate is 'Credit risk and interest rate risk cannot affect insolvency risk.' The two answer choices are: TRUE and FALSE.
Option 1 (TRUE): This claim suggests that credit risk and interest rate risk have no impact on insolvency risk. In reality, both credit risk (the risk that a borrower defaults) and interest rate risk (the risk that changing rates affect a borrower's ability to service debt or the value of assets/liabilities) can contribute to insolvency risk by reducing cash flows, increasing debt service costs, or degrading asset values. Therefore, treating them as incapable of influencing insolvency contradicts financial theory and real-world experience where these risks interact with overall financial distress.
Option 2 (FALSE): This asserts that the initial statement is not true, meaning credit risk and interest rate risk can affect insolvency risk. This aligns with how insolvency risk is shaped: higher probability of default (credit risk) or tighter funding conditions due to rising rates can push a company toward insolvency, especially if liquidity is constrained or if debt covenants become problematic. The mechanism can be through cash-flow stress, higher debt service costs, or reduced market confidence.
Exploring potential misconceptions in Option 1: Some might think insolvency is only about current solvency measures and ignore external risk factors; however, insolvency is a function of ongoing cash-flow viability and liabilities, which are directly influenced by default risk and interest costs. Additionally, interest rate movements can affect the value of liabilities (e.g., floating-rate debt or discounting future obligations) and the ability to refinance, both of which feed into insolvency risk.
Exploring potential misconceptions in Option 2: It is important to recognize that saying 'FALSE' here does not imply that credit and interest rate risk are always the sole drivers of insolvency, but rather that they can influence insolvency risk under various conditions, such as deteriorating liquidity, adverse credit markets, or covenant pressures. It does not overstate their effect beyond plausible financial mechanisms.
Additional nuance: In practical risk management, insolvency risk is typically assessed through credit risk and market risk (which includes interest rate risk), among other factors. The interaction among these risks can amplify the likelihood of insolvency, especially for highly leveraged or cash-flow sensitive entities, making the statement that such risks cannot affect insolvency inconsistent with standard risk frameworks.
In summary, the reasoning shows that assuming no connection between credit/interest rate risk and insolvency risk ignores well-documented pathways by which those risks propagate distress, whereas acknowledging the connection aligns with established financial concepts and risk interdependencies.

Credit risk and interest rate risk cannot affect insolvency risk.

查看解析

登录即可查看完整答案

类似问题

Jordana is a travel agent. Whenever she sells an expensive vacation package, she encourages the customer to buy travel insurance, which provides reimbursement in case of trip cancellation due to illness or another emergency. Jordana is trying to reduce her customers' __________ risk.

What is financial risk?

"Leverage increases risk. Risk involves..." (fill in the blank)

Credit risk and interest rate risk cannot affect insolvency risk.

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单