Section 2a

Question 0

Business risk

Answer 0

Also called capital risk. The chance the investor might lose all of their money or capital under circumstances unrelated to the financial strength of the issuer.

Question 1

Credit risk

Answer 1

Also called financial risk or default risk. Involves the danger of losing all or part of ones invested principal thru failure of the issuer.

Bonds backed by the federal government or municipalities tend to be very secure and have low credit risk.

Long term bonds safer then short term. Mutual funds offer increased safety through diversification.

Question 2

Specialized mutual funds

Answer 2

Also called sector mutual funds(such as precious metals) are generally non-diversified and carry high beta.

Question 3

Reinvestment risk

Answer 3

The risk of not being able to reinvest interest income or principal at the same rate. This is of particular concern during periods of falling interest rates