Counterparty risk is the risk that the other party in an agreement will default, or fail to live up to its contractual obligation.When Joe buys a corporate bond from ABC Corporation, Joe expects to receive bi-annual payments along with his principal back at maturity. Joe is assuming the unlikely, but possible, counterparty risk that ABC will not pay him the amount he’s due at the agreed upon times. If XYZ Bank agrees to loan Joe money to start a business, Joe is expected to pay that loan back at the times and terms the two parties agree upon. The possibility that Joe won’t meet his obligation is the counterparty risk XYZ assumes. Counterparty risk, also known as default risk, gained more awareness following the 2008 financial crisis. Investors of all types assume counterparty risk. It can be reduced if one party mandates a co-signor or a highly rated guarantor.