Definition:
Sometimes things go awry. And in the investment world, that can be a disaster for bondholders.
Default risk describes the danger that a bond issuer will become insolvent and unable to honor its debt obligations. Although bondholders get priority over stockholders in a bankruptcy, it is possible to get stuck holding a bond that is worth less than face value even upon maturity.
Default risk is highest for below-investment-grade securities known as junk bonds. Default risk is lowest for government-backed securities.
Credit default swaps are a derivative investment that is used to protect against default risk.
Bond ratings from companies such as Moody's and Standard & Poor'sare used to measure default risk.