FINANCIAL RISK Definition

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FINANCIAL RISK is the possibility of whether a bond issuer will default, by failing to repay principal and/or interest in a timely manner. Usually bonds issued by the federal government, for the most part, are immune from default (if the government needs money... more is printed). Bonds issued by corporations are more probable to be defaulted on, since companies often go bankrupt. Municipalities occasionally default as well, but it is much less common. Can also be called default risk or credit risk.

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RISK-FREE RATE is the rate of return available in the market on an investment free of default risk.

SENSITIVE LIABILITIES normally refers to interest rate sensitive liabilities (i.e., liabilities where there is a floating interest rate).

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