Default Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments — the core credit risk in fixed income.
Default risk (also called credit risk) is the chance that a borrower fails to meet debt obligations — missing coupon payments or failing to repay principal at maturity. When a company defaults, bondholders typically recover a fraction of face value (recovery rate), often 20–60 cents on the dollar depending on seniority in the capital structure.
Default risk is the primary reason corporate bonds yield more than Treasuries. It is priced via credit spreads, with rating agencies (Moody's, S&P, Fitch) providing standardized risk assessments.
For equity investors, rising default risk in HY markets is a macro warning signal — it often precedes broader credit tightening and economic stress that eventually weighs on equities too.
Related Terms
Bond
A debt instrument in which the issuer borrows money from the buyer and promises to pay periodic interest plus return the principal at maturity.
BeginnerCredit Rating
A graded assessment by agencies like Moody's, S&P, and Fitch of an issuer's ability to repay debt — the standardized scale for default risk.
BeginnerCredit Spread
The yield difference between a corporate (or other non-government) bond and a Treasury of the same maturity — the market's price for credit risk.
IntermediateHigh-Yield Bond
Bonds rated below investment grade (BB+/Ba1 or lower) — offering higher yields to compensate for elevated default risk.
IntermediateMunicipal Bond
Debt issued by U.S. states and local governments, whose interest is typically exempt from federal (and sometimes state) income tax.
Intermediate