Financial Quotient

What is credit risk in bonds?

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Credit risk is a critical risk component embedded in bonds. It comprises default risk and recovery risk for these bonds which usually offer investors fixed periodic interest payments and principal payback at maturity.

The default risk represents the probability that the promised interest or principal payments may not be made by the issuer. In the case of late or missing payments, the recovery risk refers to how much the investors would eventually receive from the issuer at the final settlement.

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A version of this article appeared in the print edition of The Sunday Times on February 10, 2019, with the headline What is credit risk in bonds?. Subscribe