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FP Article 15.3 (To sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

Investment Risk - Credit Risk

by Rajen Devadason

Remember that credit is money. 

Benjamin Franklin

  Credit risk is the type of risk you accept each time you lend money to some person, company, bank or government! 

You lend money to a company or a government when you buy its bonds.

You lend money to a bank when you deposit your money in it.

Credit risk is therefore the other side of the coin of borrowing risk.

Take note...

 

 

 

 

 

 

 



It's useful for you bear in mind that credit risk is essentially the finite risk almost every creditor takes on - when lending money - that the debtor will not repay.  

This is an article explaining credit risk. I hope you enjoy reading it. But if it isn't what you're looking for, you're welcome to search for something that better meets your needs. Thank you for allowing me to serve you.

Rajen Devadason

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Frankly, pretty much the only investment asset that's accepted globally as being risk-free, meaning it is utterly devoid of any credit risk, is the US Treasury bill commonly dubbed the US T-bill.

These are extremely short-term bonds that are auctioned off by the US Department of the Treasury every Monday. They typically carry tenures of 3-6 months.

Because of the short tenure of T-bills, they are also deemed to be completely devoid of interest rate risk.

Every other creditor is considered to have some finite amount of credit risk associated with it or him or her!

Money lenders such as loan sharks and bankers, in particular, are constantly subject to credit risk. Also, if you were to buy a corporate junk bond issued by a company of less than sterling financial standing, simply because it offers a high coupon (or annual interest) rate, you might find yourself suffering a loss.

If you'd like to continue to learn more about other types of investment risk, here's additional information for you...

15 Types of Investment Risk (OR, to sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

1. Borrowing Risk

2. Company Risk

3. Credit Risk

4. Currency Risk

5. Diversification Risk

6. Industry Risk

7. Inflation Risk

8. Interest Rate Risk

9. Liquidity Risk

10. Lost Opportunity Risk

11. Manager's Risk

12. Market Risk

13. Market Timing Risk

14. Political Risk

15. Prepayment Risk

 

 

© Rajen Devadason

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Rajen Devadason, CEO RD WealthCreation Sdn Bhd & RD Book Projects
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