Default risk

Submitted by neha.gada on Thu, 01/03/2019 - 14:43

Default risk refers to the chances that a borrower will fail to pay its financial obligations under a contract. For instance, if a person who has taken a home loan from a bank fails to make monthly payment of EMIs, we say the customer has defaulted in his payment obligations. The bank is prone to default risk, or risk of its customers failing to make timely payment of its loans.

In case of a bond, which is a debt obligation for the bond issuer, the borrower (bond issuer) can get into a situation where it is unbale to make periodic interest payments or is unbale to return the principal to the bond holders when the bonds mature. If such a scenario occurs, it is said that the bond issuer has defaulted. When investors invest their money in bonds issued by various entities, they are subject to default risk i.e. the likelihood of the bond issuer defaulting in its payments.

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