What is a 'Default Premium'

A default premium is the additional amount a borrower must pay to compensate the lender for assuming default risk. A default premium is generally paid by all companies or borrowers indirectly, through the rate at which they must repay their obligation.

BREAKING DOWN 'Default Premium'

Typically the only borrower in the United States which would not pay a default premium would be the U.S. government. However in tumultuous times, even the U.S. Treasury has had to offer higher yields in order to borrow. The default premium is paid by companies with lower grade bonds or by individuals with poor credit.


As an illustration, companies with poor financials will tend to compensate investors for the additional risk by issuing bonds with high yields. Individuals with poor credit must pay higher interest rates in order to borrow money from the bank.

RELATED TERMS
  1. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  2. Default

    1. The failure to promptly pay interest or principal when due. ...
  3. Credit Default Contract

    Security with a risk level and pricing based on the risk of credit ...
  4. Temporary Default

    A bond rating that suggests the issuer might not make all of ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an ...
Related Articles
  1. Taxes

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  2. Insights

    Why and When Do Countries Default?

    Countries can default on their debt. This happens when the government is either unable or unwilling to make good on its fiscal promises.
  3. Personal Finance

    What Happens in a Default?

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

    Understanding Credit Risk

    Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt.
  5. Financial Advisor

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  6. Trading

    Why Are U.S. Companies Borrowing in Euros?

    U.S. companies with operations that need funding in Europe are likely to take advantage of lower European borrowing rates.
  7. Investing

    High-Yield Bond ETFs: 3 Reasons to Avoid Them

    Examine high-yield bond performance in 2016. Why do rising default rates, falling recovery rates and Fed rate hikes make these securities worth avoiding?
  8. Investing

    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.
  9. Personal Finance

    Explaining Non-Recourse Debt

    Non-recourse debt limits a lender as to what it can and cannot pursue for collateral.
  10. Personal Finance

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.
RELATED FAQS
  1. 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 >>
  2. Why do high profiting sales mitigate credit risk?

    Learn more about credit risk in loaning to individuals and businesses. Understand how credit risk is determined and the impact ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
Hot Definitions
  1. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  2. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  5. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  6. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
Trading Center