Financial Industry Regulatory Authority (FINRA) Practice Exam 2026 - Free FINRA Practice Questions and Study Guide

The correct answer highlights a risk that is primarily associated with foreign debt instruments rather than domestic ones. Exchange risk, often referred to as currency risk, is the possibility that changes in the exchange rate will negatively impact the value of an investment when it is converted back into the investor's home currency. This risk is unique to foreign debt instruments, as domestic debts are typically issued and repaid in the same currency, thus avoiding fluctuations in currency values.

In contrast, risks such as political, repayment, and interest rate are relevant to both foreign and domestic debt instruments. Political risk can affect both types of investments but is often more pronounced for foreign investments due to the potential for instability in the issuing country. Repayment risk, the risk of default by the issuer, also applies universally to debt instruments, irrespective of their geographic origin, as all issuers must meet their obligations to bondholders. Lastly, interest rate risk is present for all debt instruments since changes in interest rates can affect the value of bonds in both domestic and international markets.

Understanding the implications of these various risks is crucial for investors when considering their options in the debt instrument market. In this case, recognizing that exchange risk is a unique concern for foreign investments clarifies why it does not apply to domestic debt