The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards. this principle is the fundamental one in determining interest rates, and it is illustrated by the fact that
(a) successful investors are distinguished by an ability to make very risky investments without worrying about their money
(b) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
(c) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
(d) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
(e) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company

The correct answer is (B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral.

Explanation:

Credit risk is the possibility of suffering a loss as a result of a default by our counterpart in a financial transaction, that is, the risk of not being paid.

Credit risk involves a variation in the financial results of a financial asset or an investment portfolio after the bankruptcy or default of a company. Therefore, it is a way of measuring the likelihood of a debtor (right of payment) against a creditor (right of collection) to meet its payment obligations, either during the life of the financial asset or at maturity.

This type of risk is directly related to the problems that the company may present, individually. On the other hand, market risk (which includes currency, price, volatility risk, etc.) has a systematic risk component (it is one that derives from the global market uncertainty that affects more or less grade to all existing assets in the economy).

A characteristic to consider is the form of credit risk distribution. While the market risk takes a normal distribution, which means that it is symmetric giving the same probabilities to both sides of the distribution, the credit risk is asymmetric negative. With a negative asymmetry, there are more values to the left of the distribution, that is, the average. In addition, the average of the distribution is less than the average of the normal distribution.

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