Series 7: 10.2.3. Credit Risk

10.2.3. Credit Risk

Credit risk, also known as default risk, is significant to holders of bonds. Credit risk has two related 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 the interest or principal that is due to them. U.S. Treasury bonds have 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, Standard & Poor’s, Fitch, and Moody’s. Investment-grade bonds are bonds with a Standard & P