Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Such as, payment of interest or repayment of capital or any other financial or legal obligation.
Market risk refers to, changes in the value of an investment due to changes of market factors, such as interest rates, exchange rates or stock markets. The prices of and the income generated by the securities held by pension funds may decline in response to specific events. These include:
- Direct involvement of companies whose securities are owned by the funds.
- General economic and market conditions.
- Local or global economic instability
- Currency and interest rate fluctuations.
Interest Rate Risk
This risk means that an investment's value will change due to a change in the absolute level of interest rates. Normally, rise in interest rates during the investment period may result in reduced prices of the held securities.
Liquidity risk is the difficulty which the company faces in selling an asset. In short, securities that needs to be sold early because there is not enough cash equivalents or because there is lack of an active marketplace to meet the financial needs.