Financial risk

Definition

Financial risk is the possibility of losing money on an investment or business venture. It encompasses various types of risks such as market risk, credit risk, and liquidity risk.

5 Must Know Facts For Your Next Test

1. Financial risk can affect the time value of money by increasing uncertainty about future cash flows.
2. Higher financial risk typically requires a higher return to compensate investors.
3. Discount rates often incorporate financial risk to adjust for the time value of money.
4. Understanding financial risk is crucial for calculating present and future values accurately.
5. Risk-adjusted discount rates are used to account for financial risk in TVM calculations.

Review Questions

• How does financial risk impact the time value of money?
• Why is it important to consider financial risk when determining discount rates?
• What role does financial risk play in calculating present and future values?

Related terms

Market Risk: The potential for losses due to changes in market prices.

Credit Risk: The possibility that a borrower will default on their loan obligations.

Liquidity Risk: The danger that an entity will be unable to meet short-term financial demands due to an inability to convert assets into cash quickly.