What is credit risk?

Credit risk refers specifically to the potential that a borrower will fail to meet their obligations in accordance with the agreed-upon terms of a loan or credit agreement. This risk is primarily relevant to lenders and investors who provide funds to individuals, businesses, or governments with the expectation of receiving repayment, often with interest. If a borrower defaults, the lender incurs a loss, which can significantly impact profitability and liquidity.

In contrast, other options describe different kinds of financial risks. The risk of losing money in stock investments relates to market risk, which concerns the volatility of stock prices. The risk associated with currency exchange rates pertains to foreign exchange risk, affecting those who hold assets or liabilities in different currencies. The risk that an asset will decrease in value refers to investment risk associated with the potential depreciation of various asset types, such as real estate or commodities. These other risks do not relate specifically to the borrower-lender relationship inherent in credit risk.