Credit Risk
Credit risk, also known as default risk, is significant to bondholders. Credit risk has two parts. First, it is the risk that an issuer’s perceived or actual creditworthiness will drop, causing the bond’s price to drop. Second, it is the risk that the issuer will default on the bond issue and, therefore, not pay bondholders owed interest or principal. U.S. Treasury bonds have practically no credit risk, but municipal and corporate bonds usually have some credit risk.
A bond’s credit risk is graded by the credit-rating agencies. Recall that there are three major credit-rating agencies: Standard & Poor’s, Fitch, and Moody’s. Inv
