Default Risk
Risk of debtor inability to repay debt.
Formula
Default Risk Premium = Risky Bond Yield − Risk-Free Rate
Real World
When Greece risked defaulting on its sovereign debt in 2010, borrowing costs surged above 30%, making it impossible for the government to refinance without an EU bailout.
Exam Focus
Distinguish sovereign default from corporate default; naming a real country or firm in context gains application marks.
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