Credit risk concepts: Class activity questions

1. ______________ is the risk of default on a debt that may arise from a borrower failing to
make a required payment.
2. ____________ is the probability that a bank may lead to low credit quality borrowers.
3. ___________ is the risk that the borrowers have provided a misleading information or
used the loan for unintended purpose.
4. __________ is a pledge of property or other assets that must be surrendered if the borrower
defaults.
5. ____________ refers to refusing to lend to some borrowers or financing only part of a
project.

Solution

1. Credit risk
2. Adverse selection
3. Moral hazard
4. Collateral
5. Credit rationing