Credit Risk

Definition of 'Credit Risk'
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Credit risk is the risk taken by a bond investor that the bond's issuer will default by failing to pay interest and repay principal on schedule.

Treasury securities are considered free of credit risk, since they are backed by the awe-inspiring power of the U.S. government to collect taxes to meet its obligations. But all other types of bonds entail at least a little credit risk. Typically, the more credit risk a bond entails, the larger its coupon and the higher its yield.

Rating agencies try to quantify the amount of credit risk associated with bonds by giving them ratings ranging from triple-A -- for least likely to default -- to single-C -- for most likely to default.