default risk

The risk that a partner in a business transaction will not live up to its obligations; for example, that a financial institution such as a bank or savings and loan may collapse and not be able to return the investors’ principal, or may not con-tinue paying interest. Default risk also is found in a variety of other financial sce-narios. The U.S. government helps protect against default risk by banks through the Federal Deposit Insurance Corporation (FDIC) program, which insures deposits for up to $100,000 in the event that a bank defaults. Although various insurance programs exist to protect against default risk, including the Securities Investor Protection Corporation (SIPC) program for brokerage account holders, U.S. Treasury bonds are the only investment that does not have default risk. That is because the U.S. government pledges that Treasury bond investments are protected by the “full faith and credit obligation” of the U.S. government.