Question

discuss the cost and risk of taking credit

Answer 1

Credit is basically when you are borrowing funds from the market or from an individual or from a institution. The cost related with credit is basically the flotation cots and the interest cost that one has to pay. The flotation cost is the cost of issuing the debt to raise the funds, it can be in the form of commission, or charges by the bank or the lending institution. The other cost is the Interest cost. Interest cost is cost related to funds on which you have to interest. It can be fixed in the form of coupon payment or floating and linked to any benchmark. The Risk related to credit is the risk of default or not being able to pay the annual payment or principal. If a company has taken credit from the market then it is obligated to pay the fixed amount and if it does not pay the fixed amount then it can cause bankruptcy issues for the bank and it can also create legal issues where the court might order to sell the assets and pay the creditors or the company might have to restructure the debt which will affect its creditworthiness in the market.