Credit Risk

j. describe the various forms of credit risk and describe the meaning and role of
credit ratings;

Default risk: the counterparty or the company that issued debt securities is not in a position to pay the coupon on the debt securities.

Credit spread risk: Spread is the difference between the yield on risky bonds and yield on government securities. If it increases, the prices of risky bonds come down.

Downgrade risk: the quality of the bond as assessed by credit rating agencies may come down. Due to which the spread on the bond will increase and its price decreases

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