Default Risk

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A non-payment of a financial obligation by a borrower at the time it becomes payable, give rise to default risk. Generally, in all forms of credit extensions, investors and lenders are exposed to default risk.

In context of bonds, the default risk can be stated as a risk that a bond issuer might not be able to make interest and principal payments timely. The measurement of default risk is done through ratings issued by the credit rating agencies.

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