Credit risk
The risk that a borrower fails to pay interest or principal in full and on time.
Plain languagePractical exampleConnected reading
01
What is it?
The risk that a borrower fails to pay interest or principal in full and on time.
02
Why does it matter?
It directly affects bond yields, borrowing cost, collateral needs and portfolio losses.
03
How should it be read?
Review cash flow, maturities, collateral, seniority, covenants and credit spread.
04
Common mistake
Assuming sovereign or highly rated debt has zero risk.
A simple example
The yield gap between similar-maturity bonds can reflect credit risk as well as liquidity.