Default happens when a borrower does not pay what the contract requires on time. That can mean a missed coupon, a missed loan instalment, or failure to repay principal at maturity. Lenders may restructure terms, seize collateral, or pursue legal recovery. Credit ratings and bond prices react quickly to rising default risk.
Key takeaways
- Technical default can include breaking loan covenants, not only missing cash payments.
- Default does not always equal immediate bankruptcy, but the two often travel together.
- Senior and secured creditors usually recover more than junior ones.
- Sovereign default is when a government fails on its own debt.