Default Risk

Loading the player...

What is 'Default Risk'

Default risk is 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.

RELATED TERMS
  1. Credit Default Contract

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

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

    A bond rating that suggests the issuer might not make all of ...
  4. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  5. Credit Default Insurance

    The use of a financial agreement - usually a credit derivative ...
  6. Default Premium

    The additional amount a borrower must pay to compensate the lender ...
Related Articles
  1. Economics

    Understanding Default Risk

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

    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.
  3. Professionals

    Credit Risk

    CFA Level 1 - Credit Risk. Looks at the three types of credit risk. Learn how investors can gauge the riskiness of their bonds by using these three measures.
  4. Economics

    What Happens in a Default?

    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
  5. Bonds & Fixed Income

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  6. Credit & Loans

    What Lenders Look At On Your Credit Report

    What do lenders consider when they look at your credit report? Several things, including your income and payment history.
  7. Credit & Loans

    What Lenders Look at on Your Credit Report

    What do lenders consider when they look at your credit report? It’s a simple question with a complicated answer.
  8. Professionals

    Bond Ratings

    FINRA Series 7 Online Study Guide - Section 4, Debt Securities
  9. Retirement

    Risk and Diversification: Different Types of Risk

    Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the ...
  10. Term

    What's a Debtor?

    A debtor​ is an individual or company that owes money.
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. 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 >>
  3. 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 >>
  4. 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 >>
  5. In the beginning of this year, the total par value of all CCC-rated bonds were $12 ...

    The correct answer is: d) (i) Default Loss Rate = [($1.3 billion - $625 million)/$1.3 billion] = 51.9% (ii) Dollar Default ... Read Answer >>
  6. What are some examples of risks associated with financial markets?

    Find out about the different types of risks for different classes of assets including volatility, counterparty risk and default ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center