The potential that a borrower or creditor will fail to meet financial obligations is known as which risk?

The potential that a borrower or creditor will fail to meet financial obligations is known as which risk?

• A. Audit
• B. Credit risk
• C. Consequence
• D. Environmental risk

Answer: (B)

Credit risk is the risk that a borrower or creditor will fail to meet financial obligations. This captures the chance that a loan won’t be repaid in full or on time, which can lead to financial losses, reduced cash flow, and higher loan reserves. It’s a central concern for anyone involved in lending or credit, and it is managed through credit assessments, limits, collateral, diversification, monitoring, and appropriate pricing. The other terms don’t describe this specific risk: audit refers to examining controls, environmental risk relates to environmental factors, and consequence is merely a potential outcome rather than a specific risk type.

Credit risk is the risk that a borrower or creditor will fail to meet financial obligations. This captures the chance that a loan won’t be repaid in full or on time, which can lead to financial losses, reduced cash flow, and higher loan reserves. It’s a central concern for anyone involved in lending or credit, and it is managed through credit assessments, limits, collateral, diversification, monitoring, and appropriate pricing. The other terms don’t describe this specific risk: audit refers to examining controls, environmental risk relates to environmental factors, and consequence is merely a potential outcome rather than a specific risk type.