Based in Livingston, New Jersey, Rao Chalasani previously worked as the director of trading risk management and business CTO at Bank of America-Merrill Lynch in New York City, New York. Responsible for creating firm-wide risk management platforms, Rao Chalasani steered the firm’s market and credit risk management strategies.
Credit risk refers to the potential for loss of principal or financial reward once a borrower defaults on a loan repayment or fails to meet contractual obligations. It arises when a borrower takes a loan from a lender on the expectation that future cash flows will repay the loan. Credit risk is the likelihood that the borrower will repay the loan.
In practice, many lenders evaluate credit risk through credit scores, which are calculated based on previously-taken loans. High credit scores mean a borrower repaid a loan as per the required terms. A low credit score means the borrower did not repay in time or as required.
Interest on loans is the financial reward payable to lenders for assuming a borrower’s credit risk. Banks and other lending institutions use credit risk in their calculations of interest. Individuals with a high credit risk have a much larger likelihood of default, hence they pay higher interest. Borrowers with low credit risk pay lower interest.
Credit risk is also useful in evaluating prime company bonds. When companies issue bonds, they are asking for a loan from bond buyers, promising to repay it in future. Bond ratings are an indicator of the credit risk attached to these companies. A company with low credit risk has their bonds single, double, or triple A-rated. Companies with higher credit risk have their bonds B- or C-rated.
Credit risk refers to the potential for loss of principal or financial reward once a borrower defaults on a loan repayment or fails to meet contractual obligations. It arises when a borrower takes a loan from a lender on the expectation that future cash flows will repay the loan. Credit risk is the likelihood that the borrower will repay the loan.
In practice, many lenders evaluate credit risk through credit scores, which are calculated based on previously-taken loans. High credit scores mean a borrower repaid a loan as per the required terms. A low credit score means the borrower did not repay in time or as required.
Interest on loans is the financial reward payable to lenders for assuming a borrower’s credit risk. Banks and other lending institutions use credit risk in their calculations of interest. Individuals with a high credit risk have a much larger likelihood of default, hence they pay higher interest. Borrowers with low credit risk pay lower interest.
Credit risk is also useful in evaluating prime company bonds. When companies issue bonds, they are asking for a loan from bond buyers, promising to repay it in future. Bond ratings are an indicator of the credit risk attached to these companies. A company with low credit risk has their bonds single, double, or triple A-rated. Companies with higher credit risk have their bonds B- or C-rated.
