Default risk arises from the fact that
A)borrowers differ in their ability to repay in full the principal and interest required by a loan agreement.
B)the bond price drops when interest rates rise.
C)it is inherently riskier to wait for a capital gain than to receive an immediate interest payment.
D)interest rates are far more likely to go up than to go down.

Question

Quizplus · Accepted Answer

Default risk refers to the risk that a borrower will default on a loan and be unable to repay the agreed-upon principal and interest. This risk arises because borrowers differ in their ability to repay their debts, and some borrowers are more likely to default than others. Similarly, lenders can reduce their exposure to default risk by charging higher interest rates or requiring collateral or other forms of security to protect their loans.

Default Risk Arises from the Fact That