Default

Loading the player...

What is 'Default'

Default is the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt.

2. The failure to perform on a futures contract as required by an exchange.

BREAKING DOWN 'Default'

1. Defaulting on a debt obligation can place a company or individual in financial trouble. The lender will see a default as a sign that the borrower is not likely to make future payments. For example, if Company XYZ is unable to make a coupon payment on its bonds, the bondholders would place XYZ in bankruptcy. This would give the company an opportunity to claim XYZ's assets as a form of repayment for the debt.

2. Defaulting on a futures contract occurs when one party does not fulfill the obligations set forth by the agreement. The default usually involves not settling the contract by the required date. A person in the short position will default if he or she fails to deliver the goods at the end of the contract. The long position defaults when payment is not provided by the settlement date.

RELATED TERMS
  1. Default Risk

    The event in which companies or individuals will be unable to ...
  2. Temporary Default

    A bond rating that suggests the issuer might not make all of ...
  3. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  4. Credit Default Contract

    Security with a risk level and pricing based on the risk of credit ...
  5. Default Premium

    The additional amount a borrower must pay to compensate the lender ...
  6. Cross Default

    A provisions in a bond indenture or loan agreement that puts ...
Related Articles
  1. Economics

    What Happens in a Default?

    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
  2. Economics

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  3. Bonds & Fixed Income

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  4. Professionals

    Terminating a Forward Contract Prior to Expiration

    CFA Level 1 - Terminating a Forward Contract Prior to Expiration. Learn how to terminate your position in a forward contract through use of an offset. Discusses default risk upon terminating ...
  5. Term

    What's a Debtor?

    A debtor​ is an individual or company that owes money.
  6. Professionals

    Credit Risk

    CFA Level 1 - Credit Risk. Looks at the three types of credit risk. Learn how investors can gauge the riskiness of their bonds by using these three measures.
  7. Investing Basics

    How Credit Rating Risk Affects Corporate Bonds

    Credit migration risk is a vital part of the credit risk assessment, specifically with regard to corporate bonds which underlie numerous rating changes.
  8. Investing

    What are Debt Instruments?

    A debt instrument is a documented financial obligation that enables the issuer to raise funds by borrowing money and repaying it in the future.
  9. Investing

    Junk Bonds’ Performance After the Financial Crisis

    How did higher-yielding bonds perform during and after the financial crisis of 2007-2009?
  10. Economics

    Will Argentina Default Again?

    Does a Manhattan judge's recent ruling putting Argentina on the hook for $6.1 billion in payments for its sovereign bonds increase chances of another default by South America's third-largest ...
RELATED FAQS
  1. In the beginning of this year, the total par value of all CCC-rated bonds were $12 ...

    The correct answer is: d) (i) Default Loss Rate = [($1.3 billion - $625 million)/$1.3 billion] = 51.9% (ii) Dollar Default ... Read Answer >>
  2. What level of default rate is typical for the credit services industry?

    Learn how default rates affect businesses in the credit services industry, and what rates are considered normal for a company ... Read Answer >>
  3. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  4. What factors are taken into account to quantify credit risk?

    Learn how probability of default, or PD; loss given default, or LGD; and exposure at default, or EAD, are used to help quantify ... Read Answer >>
  5. What special powers does the government have to collect student loans?

    Contact student loan companies before student loans default, as the government has the power to get its money. Prior to default, ... Read Answer >>
  6. What is the default risk of a derivative?

    Learn about default and counterparty risk for derivatives, and understand why derivatives traded over the counter have significant ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center