Definition of Default risk:
Default risk is the risk that a lender takes on in the chance that a borrower will be unable to make the required payments on their debt obligation. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. A higher level of default risk leads to a higher required return, and in turn, a higher interest rate. .
Whenever a lender extends credit to a borrower, there is a chance that the loan amount will not be paid back. The measurement that looks at this probability is the default risk. Default risk does not only apply to individuals who borrow money, but also to companies that issue bonds and due to financial constraints, are not able to make interest payments on those bonds. Whenever a lender extends credit, calculating the default risk of a borrower is crucial as part of its risk management strategy. Whenever an investor is evaluating an investment, determining the financial health of a company is crucial in gauging investment risk.
Exposure to loss due to non-payment by a borrower of a financial obligation when it becomes payable. Default risk is related to the credit worthiness of the borrower and is taken into account when setting interest rate on the requested loan.
How to use Default risk in a sentence?
- Rating agencies break down credit ratings for corporations and debt into either investment grade or non-investment grade.
- Default risk can be gauged by using FICO scores for consumer credit and credit ratings for corporate and government debt issues.
- Default risk is the risk that a lender takes on in the chance that a borrower won’t be able to make required debt payments.
- A free cash flow figure that is near zero or negative could indicate a higher default risk.
Meaning of Default risk & Default risk Definition