Default Premium

AAA

DEFINITION of 'Default Premium'

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.

INVESTOPEDIA EXPLAINS '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. Sovereign Default

    A failure on the repayment of a county's government debts. Countries ...
  2. Recession

    A significant decline in activity across the economy, lasting ...
  3. Risk

    The chance that an investment's actual return will be different ...
  4. Sovereign Bond

    A debt security issued by a national government within a given ...
  5. Assumable Mortgage

    A type of financing arrangement in which the outstanding mortgage ...
  6. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
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. Junk bonds differ because of their issuers' credit quality.
    Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  3. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  4. Chart Advisor

    ChartAdvisor for December 19 2014

    A weekly technical summary of the major U.S. indexes.
  5. Forex Strategies

    What are the most common divergence strategies implemented in forex trading?

    Discover common divergence strategies that utilize either stochastics or the MACD, the two most frequently used momentum indicators in forex trading.
  6. Technical Indicators

    What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of your investment.
  7. Trading Strategies

    What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal in the price trend.
  8. Trading Strategies

    What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover how other indicators verify movements.
  9. Technical Indicators

    What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these approaches to buying the market.
  10. Is an online adviser right for you? As with most questions in financial planning, the answer is 'it depends.' Here are a few thoughts to consider.
    Professionals

    Is An Online Financial Advisor Right For You?

    Is an online adviser right for you? As with most questions in financial planning, the answer is 'it depends.' Here are a few thoughts to consider.

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