What does credit risk refer to?

Credit risk specifically pertains to the possibility that a borrower may fail to fulfill their financial obligations, such as failing to make scheduled payments on a loan or bond. This type of risk is crucial to consider when lending money or investing in debt securities because if a borrower defaults, the lender or investor could lose some or all of their invested capital. Understanding credit risk helps investors assess the reliability of potential borrowers, which is fundamental for making informed investment decisions.

Market fluctuations, investments in emerging markets, and inflation concerns all represent different kinds of financial risks that do not directly relate to the likelihood of default; therefore, they are categorized under other risk types rather than credit risk.