Bonds & rates
Credit risk
Also called Default risk
The risk that a borrower fails to make the payments it promised.
How it works
Credit risk is what separates a government bond from a corporate one, and an investment-grade corporate from a high-yield issuer. Higher risk demands a higher yield.
It is not binary. Deteriorating credit shows up as widening spreads and rating downgrades long before an actual default, and the price falls accordingly.
Related terms
- Credit ratingAn agency’s assessment of how likely a borrower is to repay, on a lettered scale.
- Credit spreadThe extra yield a corporate bond pays over a government bond of the same maturity.
- High-yield bondDebt rated below investment grade, paying more because default risk is materially higher.
- DefaultA borrower failing to make a payment, or breaching a term of the debt agreement.
- Recovery rateHow much of a defaulted bond’s face value holders eventually get back.
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