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 tax treatment of financial instruments differs.
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 arises from the fact that borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. Some borrowers may have difficulty making their payments, leading to default or delay in payments. This risk is inherent in all types of lending activities and is the primary reason why lenders charge interest rates and impose other terms and conditions on loans to manage this risk.

Default Risk Arises from the Fact That