Default

Default usually happens when a borrower fails to pay interest or principal as promised. Principal is the sum borrowed; interest is the extra paid for the use of it.

Say a bond pays $50 a year on $1,000 lent. If the issuer never pays that $50, or does not return the $1,000 when the bond matures, it has defaulted. Holders may recover part of what they are owed, receive it late, or lose it.

Default risk, the chance of this happening, differs by borrower. Credit rating agencies publish opinions on how likely an issuer is to pay, and bonds paying higher interest generally signal more perceived risk. US Treasury bonds carry very little default risk, though their prices still move with interest rates. The word also covers ordinary borrowing: a person who stops paying a loan is in default.