What does the term "credit risk" refer to in debt securities?

The term "credit risk" specifically refers to the risk that a bond issuer will default on interest or principal payments. This encompasses the potential for the issuer to be unable to meet its debt obligations, which could result in investors losing some or all of their invested capital. Credit risk arises from the financial strength and the creditworthiness of the bond issuer, making it a crucial consideration for investors evaluating debt securities. If an issuer is deemed high risk, the bond may have to offer higher yields to attract buyers, reflecting the additional risk taken on by the investor.

The other options reflect different types of risk associated with debt securities but do not accurately define credit risk. For instance, interest rate risk involves fluctuations in market interest rates affecting the value of existing debt securities, while inflation risk pertains to the eroding purchasing power of money over time. Currency fluctuations are related to foreign exchange risk, which affects investments in international bonds. Understanding these distinctions is vital for investors managing their portfolios in debt and money markets.