Default

A default is when a borrower fails to pay the principal or interest they promised. It can happen to individuals, companies and countries alike. It describes losing the ability to pay, not simply refusing to.

For an individual it follows long-running delinquency and damages their credit. For a company it means insolvency and usually bankruptcy proceedings. When a country defaults it is called a sovereign default, and Argentina and Greece have both been through it more than once.

Defaults are dangerous because they rarely stop at one place. Creditors who do not get paid struggle to pay their own debts, and their creditors wobble in turn. That chain is how the 2008 crisis spread around the world.

For an investor, an unusually high bond yield is the warning. That extra yield is not free money; it is the price tag on the risk of not being repaid. Read the credit rating alongside the yield, and never put everything in one issuer.