Default Risk

Posted in Finance, Accounting and Economics Terms, Total Reads: 1430

Definition: Default Risk

It is the risk attributed to the non-satisfaction of terms and conditions of the debt obligation by the issuer with respect to the timely payment of coupons (interest) as well as the principal amount.

The default risk does not mean that whole investment would be lost. The investor would still be able to recover a part of the investment. The “RECOVERY RATE” is that percentage which the investor would be able to recover in case of a default.

The probability of the issuers of bonds to default is called “DEFAULT RATE”.

With these recovery and default rate, the estimated expected loss in case of default can be computed.


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