BUSINESS FINANCE

TEACHER: VIC ANTHONY M. CRUCILLO

 Learning Objectives

1 2 3
Compare and Enumerate the Determine the possible
differentiate systemic different types of ways in reducing risk.
and unsystemic risk; systemic and
unsystemic risk; and
 The Risk of Investing

Systematic risk – is Unsystematic risk – is

attributable to outside a risk within the
forces that affect all control of the
types of investment company.
TYPES OF SYSTEMATIC
RISKS
 Currency Risk

• It refers to the risk that the operations of

a business or the value of an investment
will be affected by changes in exchange
rates.
• For example, if money must be converted
into a different currency to make a certain
investment, changes in the value of the
currency relative to the American dollar
will affect the total loss or gain on the
investment when the money is converted
back.
 Equity Risk

It is the risk that the market

value of shares will increase
or decrease.
 Inflation Risk

• It refers to the
possibility that the
value of assets or
income will decrease
as inflation shrinks the
purchasing power of a
currency.
 Country Risk

• It concerns the
potential volatility of
foreign stocks and
default of foreign
government bonds
due to political and/or
financial events in a
particular country.
 Interest Rate Risk

• It refers to the possibility that

the value of security,
particularly bonds, is reduced
due to an increase in interest
rate.
Purchasing
Power Risk

It is a risk that inflation

will erode the purchasing
power of the portfolio of
securities.
 Event Risk

• It is the uncertainty that such

an event may happen.
• An example is the likelihood
that the rating of a bond will
drop due to an event, such as
the taking on of additional
debt or recapitalization of a
company.
TYPES OF
UNSYSTEMATIC RISK
 Principal Risk

• It is the risk of losing the

amount invested due to
bankruptcy or default.
• There is always the
possibility that due to
some circumstances,
invested money will
decrease or completely
disappear.
 Credit Risk

• It is the possibility that the bond issuer

will default to pay the principal and
interest in a timely manner.
• Bonds issued by corporation are more
likely to be defaulted on, since
companies often go bankrupt.
 Liquidity Risk

• It is the risk that arises from the

difficulty of selling an asset.
• An investment may sometimes
need to be sold quickly.
 Call Risk

• It refers to the cash flow risk

resulting from the possibility
that a callable bond will be
redeemed before maturity.
• Callable bonds can be called
by the company that issued
them. This means that the
bonds have to be redeemed
by the bondholder, usually so
that the issuer can issue new
bonds at a lower interest rate.
 Business Risk

• It is the risk associated with the unique

circumstances of a particular company, as they
might affect the price of that company’s
securities.
• It is caused by fluctuations of earnings before
interest and taxes.
 Reduction of Risk
In order to reduce the level of risk in the
investment, the following options may be
considered:
1. Diversification or spreading the funds in
different types of investment.
2. Insurance for possible economic losses.
3. Have a business plan to follow so that the risk
may be considered before the implementation
of projects or actual investments.
4. For financial risk, take a look at debt ratios
which are indicators of possible cash flow
problems.
 Activity 2.1

•Using Venn Diagram, compare

and contrast systematic and
unsystematic risk.
 Activity 2.2
a.Among the different types of systematic risks, which
is to be in the top priority, and which can be in the
least of priorities in terms of addressing them. Explain
your answers.
b.Among the different types of unsystematic risks,
which is to be in the top priority, and which can be in
the least of priorities in terms of addressing them.
Explain your answers.