In the context of investments, what does 'credit risk' refer to?

Credit risk specifically pertains to the likelihood that a borrower may default on a loan or fail to meet contractual obligations, resulting in a loss to the lender or investor. This risk is particularly relevant in fixed income investments, such as bonds, where investors rely on the issuer to make timely interest payments and repay the principal upon maturity. Understanding credit risk is crucial for investors because it helps them assess the potential stability and reliability of their investment returns.

In distinguishing this concept from the other options, losing capital on an investment can occur for various reasons, not strictly due to credit events, thus making it a broader financial risk. Fluctuation in stock prices refers to market risk and does not directly relate to an issuer's ability to fulfill debt obligations. The overall performance of the market encompasses a variety of factors beyond just borrower defaults, including economic conditions and investor sentiment. Therefore, the focus on the likelihood of default makes the understanding of credit risk highly specific and relevant to investment decisions involving lending and credit.