Question of the Week

If the government was considering a change in the federal policy on taxation of municipal bond income, this is referred to as:

a) Default risk
b) Liquidity risk
c) Exchange rate risk
d) Regulatory risk

Answer:

The correct answer is d):

Regulatory risk refers to the financial uncertainty surrounding legislative changes at the federal, state, or local level. These changes may affect potential financial rewards from securities purchased negatively or positively. For example, if the federal government changes the taxation policy on municipal bonds, investors could be hurt by having to pay income tax on the income generated.