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Hydrobond1

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Running head: SPECIFIC RISKS FOR INVESTORS FOR MINIBONDS 1

Specific Risks for Investors for Minibonds

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SPECIFIC RISKS FOR INVESTORS FOR MINIBONDS 2

Introduction

Prior to investing in any securities, it's important for investors to evaluate the risks and

profitability of the instruments that they wish to purchase or invest in (Kokobe & Gemechu,

2016). The potential investors of the recently introduced asset-based securities by Viveracque

Hydrobond 1 must be aware of the potential risks of investing in the minibonds. In this analysis,

discussions of the potential risks are presented and possible mitigation strategies. Risk

management refers to the procedure of recognizing, analyzing and either mitigating or accepting

any uncertainty in an investment. Mainly, organizations use risk avoidance, risk assumption,

risk transfer, and risk retention in the management of future events.

SPECIFIC RISKS FOR INVENTOR FOR MINIBONDS

Default risk

Default risk refers to the possibility of a bond issuer (in this case Viveracque Hydrobond

1) not being in a position to make the statutory or obligatory coupon payments as well as

principal repayment to any or all of its bondholders. To avoid this risk, bondholders and their

agents should use various accounting models and existing bond market information to estimate

the company's default risk as suggested by Berardi et al. (2004).

Risk of information asymmetry

Information asymmetry refers to an imbalance between two contracting or negotiating

parties in their respective knowledge of relevant details and factors. This imbalance ultimately

results in the party with more information to enjoy a competitive advantage. In this case, the

bond issuer may enjoy a competitive advantage over the bondholder. According to Hans and

Zhou (2012), information asymmetry can help bond traders in exploiting information to their

advantages. They can for instance use information asymmetry to forecast defaults and future

maturity and yields of their bonds. The risk of information asymmetry affects the bondholders if

they lack sufficient information to make credible prediction or bond transactions.

Liquidity risk

Liquidity risks refer to the risk that a given company (in this case Viveracque Hydrobond

1) is incapable of meeting its short-term financial obligations (like making the statutory or

obligatory coupon payments as well as principal repayment to any or all of its bondholders).

According to Houweling et al. (2005), this risk can be mitigated by analyzing the balance sheets

of a given bond issuer.

Interest rates risk and inflation risk

Interest rate risk refers to the risk that a given bondholder's investment's value will

fluctuate as a consequence of changes in the absolute value of the interest rates. Inflation risk, on

the other hand, refers to the risk that the cash flows from the proceeds of the bond investors will

not be worth as much in the future as a result of changes in the purchasing power as a

consequence of inflation.

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Running head: SPECIFIC RISKS FOR INVESTORS FOR MINIBONDS Specific Risks for Investors for Minibonds Student’s name Institution Affiliation Date 1 SPECIFIC RISKS FOR INVESTORS FOR MINIBONDS Introduction Prior to investing in any securities, it's important for investors to evaluate the risks and profitability of the instruments that they wish to purchase or invest in (Kokobe & Gemechu, 2016). The potential investors of the recently introduced asset-based securities by Viveracque Hydrobond 1 must be aware of the potential risks of investing in the minibonds. In this analysis, discussions of the potential risks are presented and possible mitigation strategies. Risk management refers to the procedure of recognizing, analyzing and either mitigating or accepting any uncertainty in an investment. Mainly, organizations use risk avoidance, risk assumption, risk transfer, and risk retention in the management of future events. SPECIFIC RISKS FOR INVENTOR FOR MINIBONDS Default risk Default risk refers to the possibility of a bond issuer (in this case Viveracque Hydrobond 1) not being in a position to make the statutory or obligatory coupon payments as well as principal repayment to any or all of its bondholders. To avoid this risk, bondholders and their agents should use various accounting models and existing bond market information to estimate the company's default risk as suggested by Berardi et al. (2004). Risk of information asymmetry Information asymmetry refers to an imbalance ...
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