Default Risk

Default risk means the risk that a borrower will fail to make required debt payments. In simple terms, default risk is the chance that someone cannot pay back a loan or bond. Default risk is important because it can affect bond prices, credit spreads, bank lending, and investor confidence. Higher default risk usually means investors demand higher returns for lending money. For example, if a heavily indebted company struggles to generate cash, investors may believe its default risk is rising. Default risk is not the same as temporary financial stress. A borrower may face pressure but still avoid default if it can raise money, cut costs, or restructure debt.