Friday, August 28, 2009

default risk and interest rate

another important factor causing one interest rate to differ from another is the degree of default risk carried by individual securities. investors face many different kinds of risk, of course, but one of the most important is default risk-the risk that a borrower will not meet all promised payments at times agreed upon. All securities expect U.S. government securities are subject to varying degrees of default risk.if you purchase a 10-year corporate bond with a $1,000 par value and a coupon rate of 9 percent, the issuing company promises in the indenture (i.e., bond contract) that it will pay you $90 a year (or more commonly, $45 every six months) for 10 years plus $1,000 at the end of the 10-year period. failure to meet any of these promised payments on time puts the borrowers in default, and the investor may have to go to court to recover at least some of the monies owed.

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