Which term is another name for default risk?

• A. Debit Risk
• B. Credit Risk
• C. Rate Risk
• D. Risk Free

Answer: (B)

Default risk is the possibility that a borrower won’t repay interest and principal as agreed. In financial markets this risk is known as credit risk—the danger that a counterparty’s creditworthiness deteriorates and obligations aren’t met. Understanding this helps explain why market participants look at credit ratings, spreads, and issuer quality to assess potential losses. Rate risk, by contrast, is about how changes in interest rates affect bond prices and yields, not the borrower’s ability to pay. The idea of a risk-free asset refers to something with effectively no credit risk, like a highly rated government security, so that term doesn’t describe default risk. So, the term that matches default risk is credit risk.