Define: Default Risk

UK Accounting Glossary

Definition: Default Risk



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Full Definition of Default Risk


Default risk is the risk born by a creditor that a debtor will default. Default risk is also called credit risk or financial risk. Creditors are compensated for lending to debtors with higher levels of default risk by the potential for higher rates of return. Consider the corporate bond as a form of debt with inherent default risk. Companies with higher default risk borrow at higher rates. An AAA-rated company can issue bonds at the lowest interest rate given its low default risk. Companies that may have too little cash flow to satisfy their current (or future) debt service obligations have a high default risk. When bonds issued by such companies are rated below investment grade, the bonds are called junk bonds. When the default risk of a company changes, the market price of its bonds will shift to adjust compensation to current bondholders.


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Default Risk. PayrollHeaven.com. Retrieved February 21, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/default-risk/

Definition Sources


Definitions for Default Risk are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • BusinessDictionary.com
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 7th February 2020.