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    Question

    Which of the following statements about credit risk is

    incorrect?
    A Risk of loss in a bond portfolio due to changes in interest rates is a form of credit risk Correct Answer Incorrect Answer
    B Credit risk arises from events like corporate bankruptcy Correct Answer Incorrect Answer
    C Credit risk is also referred to as Default risk Correct Answer Incorrect Answer
    D Risk of non-payment by a counterparty in a derivatives transaction is a form of credit risk Correct Answer Incorrect Answer
    E All are correct Correct Answer Incorrect Answer

    Solution

    • Credit Risk (Default Risk): The possibility that a borrower, bond issuer, or counterparty fails to meet their contractual obligations (non-payment of principal or interest). Examples include corporate bankruptcy or derivative counterparty default. • Statement A is incorrect because the risk of loss due to changes in interest rates is not credit risk; it is interest rate risk (a type of market risk). • Statement B, C, and D are correct → all describe valid forms of credit risk.

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