Default risk
Default risk is the risk that a borrower may not pay the interest and/or principal on a loan when it becomes due. If the issuer defaults, investors receive less than the promised return on the bond. Default risk is influenced by the financial strength of the issuer and also by the terms of the bond contract, especially whether collateral has been pledged to secure the bond. The greater the default risk, the higher the bond's yield to maturity.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Default risk. The risk that a borrower may not pay the interest and/or principal on a loan when it becomes due. If the issuer defaults, investors receive less than the promised return on the bond. Default risk is influenced by the financial strength of the issuer and also by the terms of the bond contract, especially whether collateral has been pledged to secure the bond. The greater the default risk, the higher the bond's yield to maturity.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
