Credit risk
Credit risk is the chance that a borrower fails to repay interest or principal in full or on time. It is the risk a lender takes. A higher interest rate is not the market being generous: it is the market pricing that risk.
What it means
A bond is a loan you give to a borrower, who promises interest and your money back later. A promise is only as good as the one making it. Credit risk is the chance that the promise is not kept in full or on time.
Government and company borrowers
A government can raise money through taxes and manage its own currency, so it almost always keeps its word. This is called sovereign backing. A company depends on selling goods or services, and its income can fall in a bad year, so it may struggle to repay everyone in full. That is why a corporate bond carries more credit risk than a government bond.
Why the rate is higher
Nobody would lend to a less certain borrower at the same rate as a very certain one. So the less certain borrower has to offer more to attract the same money. The extra interest is payment for the extra credit risk. It is not a bonus.
How to look at it
Before the extra rate feels attractive, ask who promises each payment and what could stop it from being kept. Rating agencies publish credit ratings that estimate this risk, and ratings change, so check the current one and its date. Maetis does not give investment advice.
Two bonds for the same money (hypothetical numbers)
Suppose you put ₹50,000 in a government bond paying 6 percent, and the same ₹50,000 in a company bond paying 10 percent. After a year the government bond pays ₹3,000 and the company bond ₹5,000. The extra ₹2,000 is what the market pays you for accepting the chance that the company does not repay in full. If the company runs into trouble, you could receive less than promised, or nothing.
Common questions
- What is credit risk in simple words?
- The chance that a borrower does not repay what it owes, on time and in full.
- Why do corporate bonds pay more than government bonds?
- Because a company is less certain to repay than a government, and the higher rate pays for that extra credit risk.
- Is a higher interest rate always better?
- No. A higher rate usually signals higher risk. It is a price for the risk, not a gift.
- Is a fixed deposit free of credit risk?
- No loan is entirely free of it. A bank deposit is very unlikely to shrink, and deposits are insured up to a limit, but the limit can change, so check the current rules.