Which of the following risks applies to both foreign and domestic debt instruments?

The risk that applies to both foreign and domestic debt instruments is political risk. Political risk refers to the uncertainties and potential adverse effects on investments that arise from changes in government policy, political instability, expropriation, or other political events that might affect the ability of a company or government to fulfill its debt obligations.

Political risk is relevant regardless of whether an investor is dealing with instruments issued in their home country or abroad. For domestic debt instruments, political risk can emerge from domestic policy changes, regulatory shifts, or partisan political turmoil. Conversely, for foreign debt instruments, political risk becomes even more pronounced, as investors must consider factors such as foreign government changes, civil unrest, or political decisions that could impact currency stability or international relations.

Ultimately, political risk serves as a significant factor for both types of debt instruments, as it can directly influence investors’ perceptions of creditworthiness and the likelihood of timely repayment. Understanding this risk is crucial for making informed investment decisions in various markets.