[1] For lenders the risk includes late or lost interest and principal payment, leading to disrupted cash flows and increased collection costs.
Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants.
[5] With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher-risk customers and vice versa.
[9] For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively.
The existence of such risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country.
Debt rescheduling likelihood can increase if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.
[15] Financial institutions or other transaction counterparties may hedge or take out credit insurance or, particularly in the context of derivatives, require the posting of collateral.