What Is a Default? Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security. Individuals, businesses, and even countries can default on their debt obligations. Default risk is an important consideration for creditors. Key Takeaways A default occurs when a borrower stops
What Is a Default Model? A default model is constructed by financial institutions (FIs) to determine the likelihood of a default on credit obligations by a corporation or sovereign entity. These statistical models often use regression analysis with certain market variables that are pertinent to a company’s financial situation to identify the nature and scope of credit risk. Internally, a
What Is Default Premium? A default premium is an additional amount that a borrower must pay to compensate a lender for assuming default risk. All companies or borrowers indirectly pay a default premium, though the rate at which they must repay the obligation varies. How Default Premium Works Typically the only borrower in the United
What Is Default Probability? Default probability is the likelihood over a specified period, usually one year, that a borrower will not be able to make scheduled repayments. It can be applied to a variety of different risk management or credit analysis scenarios. Also called the probability of default (PD), it depends, not only on the
What Is the Default Rate? The default rate is the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments. The term default rate–also called penalty rate–may also refer to the higher interest rate imposed on a borrower who has missed regular payments on a
What Is Default Risk? Default risk is the risk that a lender takes on in the chance that a borrower will be unable to make the required payments on their debt obligation. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. A higher level of default risk leads to
What Is a Defeasance Clause? A defeasance clause is a provision in some mortgage contracts indicating that the borrower will receive the title to the property once all of the mortgage payments have been made. Key Takeaways A defeasance clause in a mortgage provides for the borrower to receive the title to the property once
What Is the Defeasance Process? The defeasance process is a means by which borrowers can substitute securities, typically bonds backed by the U.S. Treasury, for the existing collateral on their mortgage, such as a home or similar property. It can also be used in other kinds of financial transactions. The securities must be of sufficient
What Are Defeased Securities? Defeased securities are securities that have been secured by another asset, such as cash or a cash equivalent in a sinking fund, by the debt-issuing firm which can then nullify its balance sheet obligation. Defeasance, more generally, is any provision in a contract that voids a bond or loan on a
What Is a Defective Title? The term “defective title” refers to an impaired title on a piece of property or other asset. The defect or impairment on the title can be in the form of a lien, mortgage, judgment, or other type of encumbrance. Because other parties can lay claim to the property or asset
