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What is a default?

Default is the failure to follow through on the terms of an agreement, such as a borrower failing to repay a loan.

When bond issuers fail to make agreed-upon payments to their bond investors it is an example of a default. An individual failing to make an owed credit card payment is also a form of default.

Defaults negatively impact the credit quality of an entity. Bond issuers with lower credit ratings than their peers may offer higher interest rates on their bonds to compensate for their default risk. These are known as high-yield or junk bonds.