Short definition: Credit risk is the risk of loss arising from a borrower’s failure to repay a loan or meet contractual obligations.
Explanation: It is the possibility that a lender may not receive the principal and interest payments due on a loan or other credit instrument. Credit risk can arise from various factors, such as a borrower’s financial difficulties, economic downturns, or changes in market conditions.
Example: A bank lending money to a company faces credit risk if the company is unable to repay the loan due to financial difficulties or bankruptcy.
Additional information (optional): Credit risk is a significant concern for lenders and investors, as it can lead to substantial financial losses. Lenders and investors use various tools and techniques, such as credit analysis and credit ratings, to assess and manage credit risk.