What it is
Credit risk, also known as default risk, is the likelihood that a lender or investor will not receive the expected interest payments or the principal repayment from a borrower. This risk is assessed by credit rating agencies like Standard & Poor's or Moody's, which assign ratings to debt instruments based on the issuer's financial health and ability to meet its obligations. Higher credit risk typically demands higher interest rates to compensate investors.
In markets, credit risk is a key factor influencing bond yields and prices. Bonds from companies or governments with higher credit risk, often termed "junk bonds" or "high-yield bonds," offer higher coupons but trade at lower prices to reflect the increased chance of default. During economic downturns, credit risk concerns typically rise, leading investors to favor safer assets like government bonds, a phenomenon known as a "flight to quality."
Why it matters
Credit risk directly impacts the safety and potential return of your bond investments. Higher risk means higher potential yield but also a greater chance of losing your principal.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice