Default Model

AAA

DEFINITION of 'Default Model'

A type of model used by financial institutions to determine the likelihood of a default on credit obligations by a corporation or sovereign entity. These statistical models often use regression analysis (analyzing changes to certain market variables that are pertinent to a company's financial situation) to identify credit risk.

INVESTOPEDIA EXPLAINS 'Default Model'

In most cases, when a default model is run, the result is given as the probability of default. However, other types of default models are used to predict a company's exposure-at-default and loss-given-default. These models predominantly are used by credit rating agencies such as Moody's and Standard & Poor's (S&P).

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Merton Model

    A model, named after the financial scholar Robert C. Merton, ...
  3. Credit Cliff

    A slang term referring to the compounding of a company's credit ...
  4. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Ratings Service

    A company, such as Moody's or Standard & Poor's, that rates ...
Related Articles
  1. A credit rating is a useful tool not only for the investor, but also for the entities looking for investors.
    Investing Basics

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  2. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  3. Markets

    Are Your Stocks Doomed?

    When a company is headed for trouble, the warning signs are usually there. Learn how to spot disaster.
  4. Investing

    What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price. However, ...
  5. Options & Futures

    Writing Covered Calls On ETFs

    The strategy of writing covered calls on ETFs can limit your losses and hedge risk, but they cap your upside potential.
  6. Bonds & Fixed Income

    What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields move in opposite directions.
  7. Taxes

    Why should I keep records on my tax-exempt bond transactions?

    Keep your purchase records on all investments, including tax-exempt bonds. Though the interest is tax-free, you may owe taxes if you sell your bond for a gain.
  8. Bonds & Fixed Income

    What causes a bond's price to rise?

    Learn about factors that influence the price of a bond, such as interest rate changes, credit rating, yield and overall market sentiments.
  9. Mutual Funds & ETFs

    How can I find good investments among lower rated bonds?

    Invest in high-yield bonds through mutual funds, exchange-traded funds or closed-end funds, leaving the job of finding a good deal to an expert.
  10. Blackrock has lowered its fees to snag money leaving Pimco's bond funds. But by how much and who's following suit? Read on.
    Investing Basics

    Thank You, Pimco: BlackRock Drops Bond-Fund Fees

    Blackrock has lowered its fees to snag money leaving Pimco's bond funds. But by how much and who's following suit? Read on.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center