Investing term
What is Default?
When a borrower fails to make a scheduled payment on a debt — a missed coupon, or failure to return principal at maturity.
Default is when a borrower fails to make a payment it owes — a missed bond coupon, or failing to return the principal at maturity. For a bondholder it's the core risk of lending: the possibility that you won't get your interest or your money back.
Default is rarely all-or-nothing. When a borrower defaults, holders often recover some fraction of what they're owed through restructuring or liquidation — but that recovery can be small, and the process slow and uncertain. The likelihood of default varies enormously by borrower: stable governments borrowing in their own currency almost never default, highly rated companies rarely do, and shaky 'junk' issuers do so far more often, which is exactly why riskier bonds must offer higher yields. Default risk is the fundamental reason a bond's yield is what it is, and why credit ratings and issuer quality matter so much to bond investors.
A borrower pays its coupons, then misses one — a default. Holders may recover only part of what they're owed. It's the core risk of lending, and the reason a bond's yield is what it is.
For example
A struggling company misses a scheduled bond coupon and later can't repay the principal — a default that leaves its bondholders recovering only part of what they were owed, after a long process.
Learn it by doing
That's Default in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 19, Beyond Stocks).
Try the free lesson →Why it matters to you
Default matters because it's the ultimate risk a lender faces, and the reason yields differ across bonds. A higher yield isn't free — it's compensation for a greater chance of default. Understanding default reframes bond investing around a simple question: how likely is this borrower to pay me back, and what would I recover if they didn't? It's why credit ratings, issuer quality, and diversification across bonds matter, and why chasing the highest yields without weighing default risk is dangerous.
⚠ Reaching for yield and ignoring default risk
The bonds paying the highest yields are the ones the market judges most likely to default — the extra yield is payment for that risk, not a bargain. Income-seekers who buy the highest-yielding bonds without weighing default risk can suffer losses when a shaky issuer stops paying, especially in a downturn when defaults spike. High yield is compensation for real default risk.