Default Risk Law and Legal Definition

Default Risk is the probability that a borrowing agent will not pay in full the agreed interest and/or principal. A default risk can be assigned to any bond or loan agreement. However, there are some instruments considered default-risk-free. The most noted examples are the U.S. Treasury securities, which have virtually no default risk because the U.S. government guarantees that all the principal and interest will be repaid. When calculating the risk premium on financial instruments, investors use default-risk-free instruments for comparison.