Event risk is the risk that an issuer will not being able to make a payment because of dramatic and unexpected events. Such risks can affect a single issuer or an entire sector depending on the type of risk.

Event risk falls into three categories:

a) Natural Disasters or Industrial Accidents that hamper their ability to make payments causing a downgrade in their credit rating.

  • Things like floods, earthquakes, or a plant catching fire.
  • For example, if a hurricane hits the FloridaCoast, all of the insurers that have underwritten policies there may see their bonds take a hit if the damage is large and they have to make big payments to their policy holders.

b) Corporate Takeovers/Restructuring

  • Happens when a company is taken over or restructured, causing the firm to take on new or additional debt that may be too heavy for them to make their payments of interest and principal.
  • The company may also have to issue this new or additional debt at higher yields, which will also increase the debt burden.
  • This could also cause the rating agencies to get spooked and downgrade the issue.

c) Regulatory Risk

  • Comes in various forms and extends across several industries such as investment companies, insurance companies and depository institutions.
  • If a change occurs that causes an entity to divest itself form certain forms of investments, the sudden flood of the divesture of those investments could depress the market and the price of those securities and similar types of investments.


Pricing Bonds

Related Articles
  1. Managing Wealth

    Risk and Diversification: Different Types of Risk

    Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the ...
  2. Managing Wealth

    Understanding Market Risk

    Market risk is the chance that an investment’s value will decrease due to a factor that affects all investments across the market.
  3. Markets

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  4. Markets

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  5. ETFs & Mutual Funds

    Bonds

    What bonds are: Debt securities where you lend money to an issuer (e.g., a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. ...
  6. Managing Wealth

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  7. Managing Wealth

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  8. Managing Wealth

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  9. Personal Finance

    How to Financially Prepare for a Hurricane

    Insurance isn't enough: How to ensure that you're ready financially for a natural disaster.
  10. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
Trading Center