principal risk

Definition

The risk of losing the amount invested due to bankruptcy or default. There is always the possibility that through some set of circumstances, invested money will decrease or completely disappear. In this case, principal is lost, not just profits.

Use principal risk in a sentence

Before the bank gives out loans to their customers, they need to make sure that they take into account the principal risk of that customer.

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I sometimes trade on the pink sheets knowing there is a high level of principal risk involved, but the payout can be breathtaking if you choose correctly.

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As a bundle of loans in the form of a mortgage backed security moves from being current to more and more delinquent, the principal risk of loans increases and the holder of the security may begin to look for a buyer that would be willing to accept the increased risk.

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