What is Credit Risk?
Credit risk is the chance of suffering a loss as a result of a borrower’s failure to make loan payments or fulfill contractual commitments. It typically refers to the possibility that a lender won’t get the main interest that is owed, which would disrupt cash flows and raise collection costs. Excess cash flows could be written to offer more protection against credit risk. A higher coupon rate, which generates more cash flows, can be used to reduce credit risk when it is present for a lender.