Credit or Default Risk

Credit or default risk is the risk that a borrower will be unable to pay the contractual interest or principal on its debt obligations. Credit risk is usually expressed as a percentage of total assets, and it is used to assess the creditworthiness of an issuer.

The probability that a company will not be able to pay its debts can be estimated by analyzing the company's balance sheet and income statement. The balance sheet lists all of a company's assets, liabilities, and equity while the income statement lists all revenues, expenses, and earnings. The balance sheet should include cash and cash equivalents in order for it to be considered accurate. If the company has more liabilities than assets then there is an increased chance that they will not be able to repay their debts in full.


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