Explain What Contagion Risk Is and How It Affects the Financial

question 7

Essay

Explain what contagion risk is and how it affects the financial market.

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Definitions:

Loan Payment

A payment made by a borrower to a lender that may include both the principal and interest.

Effective Annual Rate

The interest rate on a loan or financial product restated from the nominal rate as an annual rate, including any compounding that occurs during the year.

APR

Annual Percentage Rate, a measure that reflects the annualized cost of borrowing including interest and other fees, making it easier to compare different financial products.

Rate of Compounding

The frequency with which interest is added to the principal balance of an investment, which can significantly affect the total interest earned or paid.