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Default Risk
by 趙永祥 2020-04-17 22:11:35, 回應(0), 人氣(627)


What Is Default Risk?

Default risk is the chance that a company or individual will be unable to make the required payments on their debt obligation. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. A higher level of risk leads to a higher required return, and in turn, a higher interest rate. 

KEY TAKEAWAYS

  • Default risk is the chance that companies or individuals won’t be able to make required debt payments.
  • A free cash flow figure that is near zero or negative indicates that the company may be having trouble generating the cash necessary to deliver on promised payments, and this could indicate higher default risk.
  • Default risk can be gauged using standard measurement tools, including FICO scores for consumer credit, and credit ratings by the likes of S&P and Moody’s for corporate and government debt issues.

Understanding Default Risk

Default risk can be gauged using standard measurement tools, including FICO scores for consumer credit, and credit ratings for corporate and government debt issues. Credit ratings for debt issues are provided by nationally recognized statistical rating organizations (NRSROs), such as Standard & Poor's (S&P), Moody's, and Fitch Ratings.