What term describes the possibility of losses due to a borrower's failure to repay a loan?

The term that describes the possibility of losses due to a borrower's failure to repay a loan is credit risk. Credit risk specifically pertains to the risk that a borrower will default on any type of debt by failing to make required payments. This risk is of particular importance to lenders and investors, as it directly impacts the quality of the investment and the potential returns.

In the context of Unit Investment Trust Funds (UITFs), understanding credit risk is crucial because UITFs may include various fixed-income instruments, such as bonds or loans, where the risk of default can affect overall fund performance. Credit risk assessment involves evaluating the creditworthiness of borrowers, which is often determined through credit ratings and the analysis of their financial stability.

Other types of risks, like operational risk, market risk, and liquidity risk play significant roles in the financial landscape but focus on different aspects. Operational risk refers to losses from failed internal processes or systems, market risk is the potential for losses due to changes in market prices, while liquidity risk involves the difficulty in converting an asset into cash without affecting its price. However, none of these directly address the specific concern of borrower default and loan repayment failure encapsulated in credit risk.