Credit Risk

1. Credit risk is the risk of loss due to the "other" party, called a counterparty, defaulting on a contract or, more generally, the risk of loss due to some "credit event." Traditionally, credit risk is applied to bonds where the debt holders were concerned that the counterparty might default on a payment (coupon or principal). Credit risk is sometimes called default risk. See also interest rate risk and reinvestment risk. An investor's risk of loss arising from a borrower who defaults; i.e., does not make payments as promised.