DEFINITION of 'Default Probability'
The degree of likelihood that the borrower of a loan or debt will not be able to make the necessary scheduled repayments. Should the borrower be unable to pay, they are then said to be in default of the debt, at which point the lenders of the debt have legal avenues to attempt obtaining at least partial repayment. Generally speaking, the higher the default probability a lender estimates a borrower to have, the higher the interest rate the lender will charge the borrower (as compensation for bearing higher default risk).
INVESTOPEDIA EXPLAINS 'Default Probability'
Most people encounter the concept of default probability when they go through the process of purchasing a residence. When a home buyer obtains a mortgage on a piece of real estate, the lending bank makes an assessment of the buyer's default risk and estimates their default probability. The higher this estimated probability, the greater the interest rate applied to the loan.
The same logic comes into play when investors buy and sell fixedincome securities on the open market. Companies that are cashflush and have a low default probability will be able to issue debt at lower interest rates. Investors trading their bonds on the open market will price safer debt with a bit of a premium compared to riskier debt. If a company's financial health worsens over time, investors in the bond market will adjust to the increased risk and trade its bonds at lower prices.

Credit Rating
An assessment of the credit worthiness of a borrower in general ... 
Skip Account
A borrower who defaults on a loan and skips out on repayment ... 
Default
1. The failure to promptly pay interest or principal when due. ... 
Default Risk
The event in which companies or individuals will be unable to ... 
Credit Risk
The risk of loss of principal or loss of a financial reward stemming ... 
Default Premium
The additional amount a borrower must pay to compensate the lender ...

What factors are taken into account to quantify credit risk?
The quantification of credit risk, assigning measurable and comparable numbers to the likelihood of default or spread risk, ... Read Full Answer >> 
Are highyield bonds better investments than lowyield bonds?
Most bonds typically make periodic payments, known as coupon payments, to the bondholder. A bond's indenture, which will ... Read Full Answer >> 
What are the risks of investing in a bond?
The most wellknown risk in the bond market is interest rate risk  the risk that bond prices will fall as interest rates ... Read Full Answer >> 
How do you calculate the geometric mean to assess portfolio performance?
The geometric mean is used to calculate the central tendency of a set of numbers. It is the average of the logarithmic values ... Read Full Answer >> 
What is the difference between a simple random sample and a stratified random sample?
Simple random samples and stratified random samples differ in how the sample is drawn from the overall population of data. ... Read Full Answer >> 
What are the advantages and disadvantages of using systematic sampling?
As a statistical sampling method, systematic sampling is simpler and more straightforward than random sampling. It can also ... Read Full Answer >>

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. 
Bonds & Fixed Income
Are HighYield Bonds Too Risky?
Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio. 
Entrepreneurship
Calculating (Small) Company Credit Risk
Determining creditworthiness of smaller and mediumsized corporations isn't as easy as for larger companies, but these tips can help. 
Investing Basics
Treasury InflationProtected Securities (TIPS)
Treasury inflationprotected securities are treasury securities that make adjustments for inflation as reflected in the Consumer Price Index. 
Investing Basics
What is the Coupon?
In the financial world, “coupon” represents the interest rate on a bond. 
Fundamental Analysis
What is Quantitative Analysis?
Quantitative analysis refers to the use of mathematical computations to analyze markets and investments. 
Fundamental Analysis
Understanding the Simple Random Sample
A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen. 
Economics
What is Systematic Sampling?
Systematic sampling is similar to random sampling, but it uses a pattern for the selection of the sample. 
Retirement
Facing Retirement? Look Beyond 100% Bonds
Retiring doesn't mean putting all your money in bonds. There are two things to consider when it comes to be invested in bonds: growth and inflation. 
Mutual Funds & ETFs
Is the PowerShares (PFEM) ETF a Good Bet Now?
What you need to know if you are considering trading PowerShares Fundamental Emerging Markets Local Debt ETF.