Credit Risk

Credit risk is the risk a borrower will be unable to pay a lender principal or interest or fulfill contractual obligations. In terms of bonds, a deterioration of creditworthiness marked by a credit rating downgrade can cause a drop in bonds, and is considered part of credit risk as well.

Credit risk is ultimately subjective.  Creditors demand a higher rate of interest for perceived higher credit risk, but credit risk may be underestimated in boom eras and “repriced” when there is a downturn in the economy.

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