Comment on the following statement: Credit risk is more than the risk that an issuer will default

What will be an ideal response?

There are risks other than default that are associated with investment bonds that are also components of credit risk. Even in the absence of default, an investor is concerned that the market value of a bond issue will decline in value and/or the relative price performance of a bond issue will be worse than that of other bond issues.

The yield on a bond issue is made up of two components: (1) the yield on a similar maturity Treasury issue and (2) a premium to compensate for the risks associated with the bond issue that do not exist in a Treasury issue—referred to as a spread. The part of the risk premium or spread attributable to default risk is called the credit spread. The price performance of a non-Treasury debt obligation and its return over some investment horizon will depend on how the credit spread of a bond issue changes. If the credit spread increases—investors say that the spread has "widened"—the market price of the bond issue will decline. The risk that a bond issue will decline due to an increase in the credit spread is called credit spread risk. This risk exists for an individual bond issue, bond issues in a particular industry or economic sector, and for all bond issues in the economy not issued by the U.S. Treasury.