Credit risk and its types:

          Credit risk can be explained as, when a borrower fails to make his payment on a specified time or when he thinks to make use of his future savings to pay his current debt or to fulfill the requirements of his current situation. It is also connected with all debtors, businesses, individuals and securities issuers. Now we can discuss about types of credit risk.

• Default risk : It is also called as counter party risk. Here the individual or the companies will not be able to make their payment on their debt obligations. Usually lenders and investors are always exposed to default risk. The default risk is connected with the credit worthiness of the borrower while setting the interest rate for the requested loan.

• Downgrade risk : Here the bond price will be declined due to the downgrade in its credit rating. The rating agency will lower its rating on the issuer. This risk arises while ascertaining the financial situation of the company.

• Sovereign risk : This is the risk of a government becoming unwilling or unable to meet its loan obligations.

• Credit spread risk : This risk spread between the risky bond and risk-free securities that will vary after purchase.

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