Q.The risk related to inability to meet fixed financial charges like interest payment and other repayment obligations is known as : (A) Operating risk (B) Financial risk (C) Business risk (D) None of the above

The risk of not being able to pay fixed financial charges like interest and loan repayments is called Financial risk.

The blank is filled by "Bull."

In stock-market terminology, speculators are classified by the price movement they expect: a Bull expects security prices to rise and therefore buys now, hoping to sell later at a higher price for a profit; a Bear expects prices to fall and sells (often short-sells) now, hoping to buy back later at a lower price. There are also related terms like 'Stag' (one who applies for new share issues hoping to sell at a premium on listing) and 'Lame duck' (a bear who is unable to fulfil their sale commitment). Since the question specifically describes anticipation of a price RISE, the correct term is "Bull."

Note: this stock-market-speculator topic belongs to the 'Financial Markets' chapter, which is not part of the current rationalised Business Studies syllabus; the underlying answer is still given correctly and honestly.

Financial risk refers to the possibility that a firm may not be able to meet its fixed financial commitments — mainly interest payments and repayment of debt — because it has financed itself partly through borrowed funds (debt), which carry a fixed obligation regardless of how the business actually performs.

Whenever a company raises funds through debt (loans, debentures), it takes on an obligation to pay a fixed rate of interest, and eventually to repay the principal, no matter how much profit the firm earns in a given year. If profits are high, using debt (financial leverage) can boost the return to equity shareholders — but if profits fall or the firm faces a bad year, that same fixed interest obligation still has to be paid, which can strain the firm's cash flows, force it to sell assets, or in a severe case lead to default or even insolvency. This uncertainty — of not being sure whether the firm will be able to comfortably meet its fixed interest/debt obligations every year — is what is meant by financial risk, and it is one of the key factors a firm must weigh (against the benefit of financial leverage) while deciding its capital structure, i.e. the mix of debt and equity it uses to finance itself.

More debt relative to equity raises fixed interest obligations, so a higher debt-equity ratio results in higher financial risk.

Financial risk is the risk arising from the use of debt, which carries fixed interest payments that must be met regardless of profits. A higher debt-equity ratio means proportionately more debt, larger fixed charges, and therefore a greater chance that the firm cannot meet these commitments in a bad year. Operating risk, in contrast, relates to the cost structure of operations, not to the financing mix.

Financial risk is the risk a company takes on when it uses debt in its capital structure — the fixed interest/repayment obligation must be paid whether or not profits are sufficient, unlike a dividend on equity which can be skipped.

When a company finances itself partly through debt (loans, debentures), it commits to fixed periodic payments of interest and eventual repayment of principal, regardless of how its business is actually performing in a given year. If earnings fall short in a bad year, the firm can still be forced to make these payments, which can threaten its solvency — this possibility of being unable to meet fixed financial charges is called financial risk. It rises as the proportion of debt in the capital structure (financial leverage) increases, which is why financial risk is one of the key factors a company weighs while deciding its capital structure.

Insurance is co-operative because many people facing the same risk pool their premiums into a common fund, and the losses of the unlucky few are met from that shared fund — risk is spread over the whole group.

In insurance a large number of persons who are exposed to a similar risk (fire, death, accident, crop failure, etc.) each pay a small amount called the premium. These premiums form a common fund. When any member of the group actually suffers the insured loss, he is compensated out of this fund.

Thus:

• No single person bears his whole loss alone.
• The loss of the few is shared by the many who contributed.
• Members indirectly co-operate with one another to give mutual financial protection.

This mutual sharing of risk is exactly what makes insurance a co-operative device.

Crop insurance compensates farmers for loss of crops caused by natural risks like drought, flood, pests or disease, in return for a premium.

A farmer's harvest can be destroyed by events beyond his control — failure of monsoon, floods, hailstorms, locust or pest attacks, plant disease. Crop insurance is designed to cover exactly this risk. The farmer pays a premium and, if the insured crop is damaged or fails because of a covered calamity, the insurer pays compensation so that the farmer's livelihood is not ruined.

It thus gives farmers financial security and encourages them to invest confidently in cultivation. A well-known government scheme of this kind is the Pradhan Mantri Fasal Bima Yojana.