In banking, credit risk is the risk that a loan recipient what?

In banking, credit risk is the risk that a loan recipient what?

• A. Repays the loan on time
• B. Does not pay back the money borrowed
• C. Changes collateral value during the loan
• D. Relies on government guarantees

Answer: (B)

Credit risk is the risk that a borrower will fail to repay the loan as agreed, meaning they default on the principal and interest. When a borrower doesn’t pay, the lender faces a loss, which is the core idea behind credit risk. Paying on time would avoid this risk, so it’s not what credit risk describes. Fluctuations in collateral value affect how much a lender might recover after a default, not the likelihood of default itself. Government guarantees can reduce potential losses in some cases, but the fundamental concept is the possibility of nonpayment by the borrower.

Credit risk is the risk that a borrower will fail to repay the loan as agreed, meaning they default on the principal and interest. When a borrower doesn’t pay, the lender faces a loss, which is the core idea behind credit risk. Paying on time would avoid this risk, so it’s not what credit risk describes. Fluctuations in collateral value affect how much a lender might recover after a default, not the likelihood of default itself. Government guarantees can reduce potential losses in some cases, but the fundamental concept is the possibility of nonpayment by the borrower.