What are default risk and credit risk associated with?

Default risk and credit risk specifically pertain to the likelihood that an issuer of debt will fail to meet its financial obligations, which includes making timely interest payments and repaying the principal amount at maturity. This risk is closely tied to the issuer’s financial health, creditworthiness, and the overall economic conditions that may affect its ability to generate revenue or maintain sufficient cash flow.

When assessing bonds and other forms of debt securities, investors closely evaluate the credit ratings assigned to issuers by rating agencies. A higher credit rating indicates a lower default risk and, consequently, a lower credit risk, while lower ratings suggest higher risks of failure to make payments according to the terms of the debt agreement.

Other considerations such as potential legislative changes, market interest rate fluctuations, and general economic downturns may indirectly impact default and credit risk but are not the primary factors under discussion. Thus, the issuer's ability to pay investors directly encapsulates the essence of default risk and credit risk.