What Is Default?
What Happens When You Default?
Examples of Default. Which statement below best describes a technical default? A technical default occurs when a borrower fails to meet the terms of their loan agreement, which can include making timely interest or principal payments. This can trigger a default clause in the loan agreement, which can lead to the lender declaring the loan in default.
What is a monetary default?
A monetary default occurs when a country or sovereign issuer is unable to repay its debt obligations in full. This can happen when the issuer does not have enough foreign currency reserves to cover its debt payments, or when it is unable to secure funding from other sources. A default can also occur when a country is unable to meet its interest payments on its debt.
What is hard default? A hard default occurs when a borrower fails to make a payment on a debt obligation and the lender declares the entire loan to be immediately due and payable. This is in contrast to a soft default, which occurs when a borrower misses a payment but the lender does not declare the loan to be due and payable. Hard defaults are much more serious than soft defaults and can have a major negative impact on a borrower's credit score.
What is default used for?
The term "default" is used in a number of different contexts when referring to fixed income securities. In general, default refers to a failure to meet the terms of a contract. For example, if a company issuing bonds fails to make a required interest payment, it is said to be in default on those bonds. Similarly, if a borrower fails to make a required payment on a loan, the borrower is said to be in default on the loan.
In the context of fixed income securities, default typically refers to a failure to make interest or principal payments when they are due. This can happen for a number of reasons, including financial difficulties at the issuer, changes in the economic environment, or simply a failure to make the required payments on time.
When a security is in default, it typically becomes much less valuable, as investors will be concerned about the issuer's ability to repay the debt. In some cases, investors may be able to recoup some of their investment through insurance or other protections, but in many cases, they will simply lose their investment.
Default is a serious issue for both issuers and investors in fixed income securities, and it should be avoided if at all possible.
What is a technical default for a bond?
A technical default occurs when a bond issuer fails to meet one or more of the technical covenants in the bond indenture. Technical covenants are typically related to the issuer's financial condition, and may require the issuer to maintain certain financial ratios, such as a minimum debt-to-equity ratio. If the issuer violates a technical covenant, it is in default, and the bondholders may take legal action.