Which term is used to discuss the likelihood of a borrower failing to meet obligations?

The term 'default risk' specifically refers to the likelihood of a borrower failing to meet their financial obligations, which includes failing to make interest payments or repay the principal amount of a loan. This concept is crucial for lenders and investors, as it directly impacts the financial health of investments and the overall risk assessment they must perform when deciding whether to extend credit or make investments.

Understanding default risk enables stakeholders to evaluate the potential losses associated with lending to or investing in a particular borrower. Higher default risks typically arise from lower credit ratings, economic downturns, or the borrower's poor financial health. This assessment influences interest rates, as borrowers with higher default risks usually face higher borrowing costs to compensate lenders for taking on additional risk.

In contrast, while 'creditworthiness' relates to a borrower’s ability to repay debts, it encompasses a broader evaluation that includes credit history and financial stability, rather than focusing solely on the likelihood of default. 'Investment grade' refers to the classification applied to bonds or other forms of debt that are considered relatively low risk, while 'market risk' pertains more to the potential for investment losses due to changes in market conditions rather than specific borrower behavior.