Question

The factor assumes credit risks associated with the

Answer 1

Answer:

PERSONAL FINANCE CREDIT & DEBT

Credit Risk

By OLIVIA LABARRE Reviewed by THOMAS BROCK Updated Mar 4, 2021

What Is Credit Risk?

Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Excess cash flows may be written to provide additional cover for credit risk. When a lender faces heightened credit risk, it can be mitigated via a higher coupon rate, which provides for greater cash flows.

Although it's impossible to know exactly who will default on obligations, properly assessing and managing credit risk can lessen the severity of a loss. Interest payments from the borrower or issuer of a debt obligation are a lender's or investor's reward for assuming credit risk.

Answer 2

Concept introduction:

Credit risk is a measurement of a borrower's creditworthiness. Lenders use credit risk to determine the possibility of recovering all of their principal and interest when they make a loan. Borrowers with a low credit risk are subjected to lower interest rates.

Explanation:

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A question has been provided to us.

The likelihood of a loss arising from a borrower's failure to repay a loan or meet contractual commitments is referred to as credit risk. It usually refers to the risk that a lender will not obtain the owed principal and interest, resulting in a disruption in cash flow and higher collection costs. Excess cash flows can be written to give further credit risk protection. When a lender is faced with increased credit risk, a higher coupon rate can be used to alleviate the risk by providing more cash flow.

Final answer:

So, the final answer is The danger of a loss arising from a borrower's failure to repay a loan or meet contractual commitments is referred to as credit risk. It traditionally refers to the risk that a lender will not obtain the owed principal and interest, resulting in a cash flow stoppage and increased collection costs. Excess cash flows can be written to give more credit risk protection. When a lender is exposed to more credit risk, a higher coupon rate can be used to offset the risk by generating more cash flow.

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