creditdefault

Credit default refers to the event in which a borrower fails to fulfill the obligations of a debt contract, most commonly when scheduled interest or principal payments are missed, or when the borrower files for bankruptcy or enters restructuring.

Credit risk research uses models and indicators to estimate the likelihood of default and potential losses. Common concepts include probability of default (PD), loss given default (LGD), and exposure at default (EAD). These metrics inform pricing, risk management, and capital allocation.

Credit default swaps (CDS) are a class of financial derivatives designed to transfer default risk. In a CDS, the buyer pays a premium to a seller, who agrees to compensate the buyer if a specified credit event, such as default, occurs. The payoff is typically the notional value minus the recoverable amount.

Default events can trigger various contractual consequences, including acceleration of payments, cross-default clauses with other debts, and rating actions by credit agencies. Recoveries after default depend on asset type, seniority, and market conditions, and are rarely full.

In regulation, credit risk and default considerations are central to frameworks such as the Basel Accords. Banks quantify expected losses and maintain capital against potential defaults. The measurement and management of credit default risk influence lending, bond markets, and structured finance.

Default risk affects corporate, financial, and sovereign borrowers, and is a key factor in pricing debt securities and insurance products. Credit default information is widely reported by rating agencies and market data providers.