default risk
Quick Summary
In economics, default risk is the possibility that a borrower will fail to make a scheduled payment on a loan or debt. This is a significant concern for investors in fixed-income securities, such as bonds.12
When a borrower defaults, they fail to deliver an expected payment of interest or principal. Lenders assess this risk using factors like a borrower's credit score. If the chance of default is perceived as high, lenders may charge a higher interest rate, including a premium to compensate for the added risk.21
Bond rating agencies evaluate issuers and assign credit ratings to bonds to indicate their level of default risk. While default risk cannot be entirely eliminated, investors often mitigate it by investing in bonds from entities with strong credit ratings.2
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