What is the market price of financial risk?

Chapter 14 (Capital management) says "risk also drives shareholder value directly as the market price of financial risk is a core driver of shareholders' required return".

1. What is meant by financial risk?
2. What is meant by the market price of financial risk?

 

1. I think financial risk essentially relates to market risks such as: interest rate fluctuations, default risk, currency rate fluctuations etc.

2. Market price of financial risk re-presents the additional premium demanded by the market participants to make on the risk inherent in a financial instrument.

For example: considers two zero coupon bonds maturing after 5 years: bond A and bond B. Bond A is issued by the central bank of the country and is therefore “risk-free”. Bond B is issued by a small company with no previous track record.

We would expect price of bond A > price of bond B. This is to compensate the market participants for the additional default risk taken on when purchasing bond B as opposed to bond A.

Since, yields and prices are inversely related, the yield on bond A < yield on bond B. So, market price of bond A < market price of bond B.