What is "credit risk"?

Credit risk refers specifically to the possibility that a borrower may fail to fulfill their financial obligations, such as missing scheduled debt payments or defaulting on a loan. This type of risk is crucial for lenders and investors to understand because it directly impacts the likelihood of recovering their investment and the expected return on that investment. In assessing credit risk, various factors are analyzed, including the borrower’s credit history, financial condition, and the economic environment.

The other options describe different types of risks. For instance, the risk associated with changes in interest rates is known as interest rate risk, which affects the value of fixed income securities as market rates fluctuate. The risk of currency fluctuations pertains to exchange rate risk, which can lead to losses when investments in foreign assets are translated back into the investor's home currency. Lastly, the risk connected with investments in emerging markets is typically referred to as political or operational risk, arising from the potential instability of governments and economies in those regions. Understanding these distinctions is essential for effectively managing various risks in a diverse investment portfolio.