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Credit Risk

Updated on March 7, 2023

A company or government has the option of raising funds through debt instruments with a fixed tenure. here, the company or the governemnt is considered the borrower. A borrower has to pay interest at the pre-determined rate and also return the prinicpal amount to the lender at the end of the specified period.

However, at the time of redemption of these instruments, there is always a risk of default from the borrower of money. This risk of default in honouring the terms of the contract and repayment of dues to the investors is known as credit risk. It is therefore important to correctly ascertain this risk at the time of investing to ensure the viability of the investment.

Categorisation of Credit Risk

Credit risk can be categorised as

Default risk – The risk of non-repayment by the issuer or the borrower of a loan
Concentration risk – Risk from exposure to a single entity or customer
Country risk – Risk of a country defaulting on foreign currency payment.