Default risk

Default risk is the possibility that the issuer of a bond will not be able to repay the underlying principal or make scheduled interest payments. Default risk is measured with the ratings issued by credit rating agencies. Entities at highest risk of default typically have a risky capital structure and unreliable cash flows that become more uncertain when economic conditions worsen. When an issuer has a high default risk, it must pay a significantly higher interest rate, and may have trouble obtaining financing at all. When the default risk on an existing bond increases, the market price of the bond will likely decline as investors sell off their holdings.

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Enterprise Risk Management