Default Risk
Risk of debtor inability to repay debt.
Formula
Default Risk Premium = Yield on Risky Debt − Yield on Risk-Free Debt
Real World
When Greece's government appeared unable to repay its debts in 2010, borrowing costs surged above 30%, forcing the EU and IMF to intervene — a real-world sovereign default crisis that froze Greek business investment.
Exam Focus
For 'explain' questions, always connect default risk to its knock-on effect on business borrowing costs and investment decisions.
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