Default Risk

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DEFINITION of 'Default Risk'

The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. To mitigate the impact of default risk, lenders often charge rates of return that correspond the debtor's level of default risk. The higher the risk, the higher the required return, and vice versa.

BREAKING DOWN 'Default Risk'

Standard measurement tools to gauge default risk include FICO scores for consumer credit, and credit ratings for corporate and government debt issues. Credit ratings for debt issues are provided by Nationally Recognized Statistical Rating Organizations (NRSROs), such as Standard & Poor's, Moody's and Fitch Ratings.

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