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Debt default

As explained in Investing for Programmers

Default risk is the possibility that a borrower will fail to make required debt payments.

Debt default is the failure, or possibility of failure, to make required interest or principal payments. In bonds, higher default risk generally requires a higher yield to attract lenders. section 5.2 section 1.2.2

Assess a bond’s exposure to default by checking:

  • The issuer, because governments, municipalities, and companies have different repayment risks. section 5.2
  • The credit rating, which provides an independent assessment of the issuer’s capacity to meet obligations. section 1.2.2
  • The yield, since accepting greater default risk typically increases potential return. section 1.2.2
  • The bond’s protections, such as collateral that may be liquidated if the borrower defaults. section 5.2

Reading a bond rating

A bond rated AAA is classified as investment grade with the lowest risk in the rating table. A bond rated CCC or below is substantially vulnerable to default, while D indicates default. section 5.2

Table 5.1 Rating of bonds
Rating tier
Moody’s
S&P
Fitch
Meaning
Investment Grade
Highest quality
Aaa
AAA
AAA
Prime credit quality, lowest risk
High quality
Aa1, Aa2, Aa3
AA+, AA, AA-
AA+, AA, AA-
Very high credit quality
Upper medium grade
A1, A2, A3
A+, A, A-
A+, A, A-
Strong capacity to meet financial commitments
Lower medium grade
Baa1, Baa2, Baa3
BBB+, BBB, BBB-
BBB+, BBB, BBB-
Adequate capacity, some susceptibility to conditions
Speculative grade
Upper speculative
Ba, Ba, Ba3
BB+, BB, BB-
BB+, BB, BB-
Higher risk of default, but financial commitment met
Highly speculative
B1, B2, B3
B+, B, B-
B+, B, B-
Material default risk, but financial obligations still met
Substantial risk
Caa1, Caa2, Caa3
CCC+, CCC, CCC-
CCC+, CCC, CCC-
Very high risk, substantial vulnerability to default
Near default
Ca
CC, C
CC, C
Highly vulnerable to default
Default
C
D
RD, D
In default

Compare Moody’s, S&P, and Fitch ratings from investment grade through default. section 5.2

How Investing for Programmers covers it

How deep it goes
Explains ratings, yield trade-offs, maturity, and collateral but stops short of modeling default probabilities or recovery rates.
Examples
Uses vanilla bonds, agency rating tiers, collateralized bonds, and the possibility of government default.
What it assumes
Assumes basic understanding of lending and returns while defining bonds, coupons, principal, maturity, and credit risk.
What you can do after
Evaluate bond default exposure by comparing issuer ratings, yields, maturities, and repayment protections.
How it connects
Connects debt default with bonds, credit risk, credit rating agencies, yield, maturity, and collateral.
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