Credit risk puts both the principal loaned and expected interest payments at risk.As a result, FIs issue financial claims that have a risk-return profile with:

Question

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FIs seek to balance risk and return by issuing financial claims that offer a higher probability of fixed upside returns and a lower probability of large downside risk. This helps to mitigate credit risk and protect the principal loaned and expected interest payments.

Credit Risk Puts Both the Principal Loaned and Expected Interest