Define credit risk. GROUP: B Short answer questions 8 × 5 = 40

Credit risk refers to the potential financial loss that a lender, investor, or financial institution may incur when a borrower or counterparty fails to meet their contractual obligations, such as repaying a loan or fulfilling a financial commitment. It arises due to the possibility of default, where the borrower is unable or unwilling to repay the principal and/or interest as agreed. Credit risk is a fundamental concern in banking, corporate finance, and investment markets, as it directly impacts profitability and solvency.

Key factors influencing credit risk include:

• Borrower’s creditworthiness (e.g., credit score, financial history).
• Economic conditions (e.g., unemployment rates, inflation).
• Collateral security (assets pledged to secure the loan).
• Loan terms (e.g., interest rates, repayment period).

Financial institutions manage credit risk through tools like credit scoring, diversification, collateral requirements, and stress testing.