Question

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

Answer 1

Credit risk is the risk of default on a debt that may arise from a borrower failing to make requires payments. This type of loss may be complete or partial. In an efficient market higher level of credit risk will be associated with high borrowing cost.

In such type of risk the lender may not be able to recieve the principal and interest payment.

Repricing risk is a type of risk which is associated with change in interest rate charged at the time a Financial contracts rate is reset or changed. It is also refers to the probability that the yeild curve will move in a way that is influenced by the value of securities tied to interest rate escpically bonds and market securities.