Which of the following is NOT an example of event risk?
A. An interim South American government imposes restrictions on the outflow of capital.
B. A corporation calls a large bond issue.
C. The U.S. Food and Drug Administration (FDA) determines that a biotech company's flagship product is harmful to consumers and cannot be marketed.
D. Ratings agencies downgrade a company's rating after the company takes on a significant amount of debt to fund a leveraged buy-out (LBO).
Answer:B
A corporation calling a large bond issue is an example of call risk. All other choices are examples of types of event risk, which includes disaster/accident, corporate, regulatory, and political risks. Event risk refers to the possibility that there may be a single event or circumstance that could have a major effect on the ability of an issuer to repay a bond obligation. The South American government’s actions are an example of political event risk. The FDA’s actions represent regulatory event risk. The LBO-related rating downgrade is an example of corporate event risk.