Saving, Managing Debt, and Budgeting

Risk / Reward

What is “default risk”?

Default risk, or credit risk, is the risk associated with investments in which the company cannot pay its debt obligation. Lenders and investors are always exposed to default risks. Our financial system is built in part on mitigating the effects of these risks by having lenders pay a higher return on a relatively riskier investment, and lower returns on a relatively safer investment. Risks to lenders include loss of principal and interest, disruption in expected cash flows for these payments, and costs borne by the lender in his attempt to collect the amount owed.


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