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Question

Which of the following statement concerning credit risk is incorrect?

A Risk of loss that may occur in a bond portfolio due to changes in interest rates is a form of credit risk Correct Answer Incorrect Answer
B Credit risk arises because of events like corporate bankruptcy Correct Answer Incorrect Answer
C Credit risk is also called Default risk Correct Answer Incorrect Answer
D Risk of non-payment by a party in a transaction of derivatives is also a form of credit risk Correct Answer Incorrect Answer
E All are correct Correct Answer Incorrect Answer

Solution

Investors take on interest-rate risk when they purchase a bond with a certain rate of interest. There is a probability that once you purchase an investment, interest rates will rise or fall, making the value of that investment worth more or less than the price it was purchased for. Credit risk on the other hand, is when a borrower or a bond holder does not make a payment of his obligation in terms of principal and interest.

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