Which risk is related to the likelihood of a borrower defaulting on a loan?

Which risk is related to the likelihood of a borrower defaulting on a loan?

• A. Market risk
• B. Interest rate risk
• C. Credit risk
• D. Operational risk

Answer: (C)

Credit risk refers specifically to the risk associated with the possibility of a borrower failing to meet their loan obligations, which includes the likelihood of default on loans. This risk is a critical concern for lenders, as it directly affects their potential for financial loss. When evaluating a borrower's creditworthiness, lenders assess various factors such as credit scores, income stability, and financial history to estimate the probability that the borrower will be able to repay the debt. In contrast, market risk relates to fluctuations in market prices that can affect the value of investments. Interest rate risk involves potential changes in interest rates that can impact the cost of borrowing or the value of fixed-income securities. Operational risk is associated with failures in internal processes, people, or systems that can hinder the company's ability to conduct business effectively. Each of these risks addresses different aspects of financial exposure, but credit risk is specifically tied to the borrower's ability to fulfill their loan commitments.

Credit risk refers specifically to the risk associated with the possibility of a borrower failing to meet their loan obligations, which includes the likelihood of default on loans. This risk is a critical concern for lenders, as it directly affects their potential for financial loss. When evaluating a borrower's creditworthiness, lenders assess various factors such as credit scores, income stability, and financial history to estimate the probability that the borrower will be able to repay the debt.

In contrast, market risk relates to fluctuations in market prices that can affect the value of investments. Interest rate risk involves potential changes in interest rates that can impact the cost of borrowing or the value of fixed-income securities. Operational risk is associated with failures in internal processes, people, or systems that can hinder the company's ability to conduct business effectively. Each of these risks addresses different aspects of financial exposure, but credit risk is specifically tied to the borrower's ability to fulfill their loan commitments.