Default occurs when a borrower fails to make required payments on a debt, whether it's interest payments, principal repayments, or both. Default can happen with any type of debt, including bonds, loans, and mortgages.
When a company defaults on its bonds, bondholders may lose part or all of their investment. The consequences of default include damaged credit ratings, higher borrowing costs, and potential legal action. For example, if a company cannot pay the interest on its bonds, it is said to be in default.
Sovereign default — when a country fails to pay its debts — can have devastating effects on the national economy and global markets. Investors assess default risk using credit ratings and bond spreads to make informed investment decisions.