Definition of Default Risk

Default Risk is the risk that the issuer of debt securities will default on its obligation to pay interest or principal on a timely basis.

Applying "Default Risk" to Securities Exams:

Default Risk is the risk assumed by investors in any type of debt security. Corporate, municipal and government issuers may default on their payment obligations due to financial difficulties. Owners of debt securities are creditors of the issuer and in the event of a default will in most cases be treated as general creditors unless the debt issue was backed by a specific pledge of assets.

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