Insolvency risk definition
Insolvency risk. The solvency of an issuer may change due to one or more of a range of factors including the issuing entity, the issuer’s economic sector and/or the political and economic status of the countries concerned. The deterioration of the issuer’s solvency will influence the price of the securities that it issues. Currency risk: for bonds denominated in a different currency than the investor’s home currency, the risk that the exchange rate between the two currencies moves. Early redemption risk: the issuer of a bond may include a provision allowing early redemption of the bond if market interest rates fall. Such early redemption may result in a change to the extended yield. Money Market Instruments Market risk: when the equity and debt markets are extremely volatile, investing in money market instruments is generally considered to be lower risk. Currency risk: investors are also exposed to currency risk insofar as underlying assets are denominated in a currency other than the one in which their investment was made. Warrants Leverage risk: as warrants often involve a high degree of leverage, the price of a warrant can be highly volatile. A relatively small movement in the price of the underlying security can result in a disproportionately large movement, favourable or unfavourable, in the value of the warrant. Market risk: a relatively small movement in the price of underlying securities can lead to a disproportionately large movement, unfavourable or favourable, in the price of the warrant. The prices of warrants can be volatile. Loss of investment: the right to subscribe, which a warrant confers, is invariably limited in time. If the right is not exercised within the pre-determined time scale, the investment becomes worthless. Losses resulting from warrants can exceed the amount invested when commissions or other transaction charges are included. Time limitation: it is essential for anyone who is considering of purchasing warrants to understand that the right to subscribe is invariably limited in time with the consequence that if the investor fails to exercise this right within the predetermined time scale then the investment becomes worthless.
Examples of Insolvency risk in a sentence
Insolvency risk of the Guarantor The investor bears the risk of the insolvency of the Guarantor.
Insolvency risk: the issuer may become temporarily or permanently insolvent, resulting in its incapacity to repay the interest or redeem the bond.