Credit Risk or Default Risk.
Credit or default risk,refers to the risk that the issuer of a fixed income security may default (i.e. The issuer will be unable to make timely principal and interest payment on the security).Credit risk is gauged by quality ratings assigned by commercial rating companies such as "Moody's Investor Service,Standard & Pooh's corporation,Duff & Phelps,McCray,Cris anti & Mafia,and Fitch Investors service,"as well as credit research staff of investment banking firms & institutional investor concerns.
Because of this risk, most bonds are sold at a lower price than or at a yield spared to comparable.US Treasury securities which are considered free of credit risk however except for the lowest credit securities (Known as "high-yield" or "Junk bonds" the investors is normally concerned more with the changes in the perceived credit risk &/or the cost associated with a given level of credit risk than with the actual vent of default.This is so because even though the actual default of an issuing corporation may be highly unlikely,the impact of the change on perceived credit risk or the spread demanded by the market for any given level of risk can have an immediate impact on the value of security.
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