Definition of Default

Default

Failure of a debtor to make timely payments of principal and interest as they become due.

Default

Failure to make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture.

Default

The failure by a debtor to make a principal or interest payment in a timely
manner.

Cross default

A provision under which default on one debt obligation triggers default on another debt
obligation.

Default premium

A differential in promised yield that compensates the investor for the risk inherent in
purchasing a corporate bond that entails some risk of default.

Default risk

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
issuer of a bond may be unable to make timely principal and interest payments.

Events of default

Contractually specified events that allow lenders to demand immediate repayment of a debt.

default premium

Difference in promised yields between a default-free bond and a riskier bond.

Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).

Asset for asset swap

Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

Collateral

Assets than can be repossessed if a borrower defaults.

Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk
to the option buyer that the option writer will not buy or sell the underlying as agreed.
Country economic risk Developments in a national economy that can affect the outcome of an international
financial transaction.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: default risk

Discriminant analysis

A statistical process that links the probability of default to a specified set of financial ratios.

Flat trades

1) A bond in default trades flat; that is, the price quoted covers both principal and unpaid,
accrued interest.
2) Any security that trades without accrued interest or at a price that includes accrued
interest is said to trade flat.

Perfected first lien

A first lien that is duly recorded with the cognizant governmental body so that the lender
will be able to act on it should the borrower default.

Secured debt

Debt that, in the event of default, has first claim on specified assets.

Sovereign risk

The risk that a central bank will impose foreign exchange regulations that will reduce or
negate the value of FX contracts. Also refers to the risk of government default on a loan made to it or
guaranteed by it.

Technical insolvency

default on a legal obligation of the firm. For example, technical insolvency occurs
when a firm doesn't pay a bill.

Unsecured debt

Debt that does not identify specific assets that can be taken over by the debtholder in case of default.

secured debt

Debt that has first claim on specified collateral in the event of default.

Mortgage Insurance

Commonly sold in the form of reducing term life insurance by lending institutions, this is life insurance with a death benefit reducing to zero over a specific period of time, usually 20 to 25 years. In most instances, the cost of coverage remains level, while the death benefit continues to decline. Re-stated, the cost of this kind of insurance is actually increasing since less death benefit is paid as the outstanding mortgage balance decreases while the cost remains the same. Lending institutions are the most popular sources for this kind of coverage because it is usually sold during the purchase of a new mortgage. The untrained institution mortgage sales person often gives the impression that this is the only place mortgage insurance can be purchased but it is more efficiently purchased at a lower cost and with more flexibility, directly from traditional life insurance companies. No matter where it is purchased, the reducing term insurance death benefit reduces over a set period of years. Most consumers are up-sizing their residences, not down-sizing, so it is likely that more coverage is required as years pass, rather than less coverage.
The cost of mortgage lender's insurance group coverage is based on a blended non-smoker/smoker rate, not having any advantage to either male or female. Mortgage lender's group insurance certificate specifies that it [the lender] is the sole beneficiary entitled to receive the death benefit. Mortgage lender's group insurance is not portable and is not guaranteed. Generally speaking, your coverage is void if you do not occupy the house for a period of time, rent the home, fall into arrears on the mortgage, and there are a few others which vary by institution. If, for example, you sell your home and buy another, your current mortgage insurance coverage ends and you will have to qualify for new coverage when you purchase your next home. Maybe you won't be able to qualify. Not being guaranteed means that it is possible for the lending institution's group insurance carrier to cancel all policy holder's coverages if they are experiencing too many death benefit claims.
Mortgage insurance purchased from a life insurance company, is priced, based on gender, smoking status, health and lifestyle of the purchaser. Once obtained, it is a unilateral contract in your favour, which cannot be cancelled by the insurance company unless you say so or unless you stop paying for it. It pays upon the death of the life insured to any "named beneficiary" you choose, tax free. If, instead of reducing term life insurance, you have purchased enough level or increasing life insurance coverage based on your projection of future need, you can buy as many new homes in the future as you want and you won't have to worry about coverage you might loose by renewing or increasing your mortgage.
It is worth mentioning mortgage creditor protection insurance since it is many times mistakenly referred to simply as mortgage insurance. If a home buyer has a limited amount of down payment towards a substantial home purchase price, he/she may qualify for a high ratio mortgage on a home purchase if a lump sum fee is paid for mortgage creditor protection insurance. The only Canadian mortgage lenders currently known to offer this option through the distribution system of banks and trust companies, are General Electric Capital [GE Capital] and Central Mortgage and Housing Corporation [CMHC]. The lump sum fee is mandatory when the mortgage is more than 75% of the value of the property being purchased. The lump sum fee is usually added onto the mortgage. It's important to realize that the only beneficiary of this type of coverage is the morgage lender, which is the bank or trust company through which the buyer arranged their mortgage. If the buyer for some reason defaults on this kind of high ratio mortgage and the value of the property has dropped since being purchased, the mortgage creditor protection insurance makes certain that the bank or trust company gets paid. However, this is not the end of the story, because whatever the difference is, between the disposition value of the property and whatever sum of unpaid mortgage money is outstanding to either GE Capital or CMHC will be the subject of collection procedures against the defaulting home buyer. Therefore, one should conclude that this kind of insurance offers protection only to the bank or trust company and absolutely no protection to the home buyer.

Hypothecation

The pledge of property and assets to secure a loan. Hypothecation does not transfer title, but it does provide the right to sell the hypothecated property in the event of default.

Recourse

In the event a person defaults on a loan, recourse is the right of a person to receive payment. Recourse could give the lender the ability to take possession of the borrowers assets.

collateral

A pledge of property or other assets by a customer who is borrowing from a financial institution. Financial institutions require collateral as security in the event that the customer defaults on his/her loan.

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