Default Risk
The risk that a borrower fails to make a promised interest or principal payment on its debt -- the central question of credit analysis. Lenders price it through the credit spread (the extra yield a bond pays over a risk-free Treasury of the same maturity), and rating agencies summarize it in a letter grade. Default risk is why a junk bond yields more than an investment-grade one: the higher coupon compensates for the greater chance of not being paid back in full. It is distinct from recovery -- default risk is the odds of a missed payment, while the recovery rate is how many cents on the dollar you collect if one happens.
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Related terms
10Y Treasury · Altman Z-Score · Asset Sensitivity · Basel III · Bond ETF · Bretton Woods
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