Default risk is higher for which type of borrower?

• A. The U.S. government
• B. A risky company
• C. A well-rated government agency
• D. A large, financially sound corporation

Answer: (B)

Default risk is the likelihood that a borrower will not repay a loan or bond. A risky company has the highest chance of default because its finances and cash flow are unreliable, making missed payments more probable. In contrast, the U.S. government and well-rated government agencies are backed by tax revenue or government guarantees, giving them very low default risk. A large, financially sound corporation also tends to have strong earnings and creditworthiness, which keeps its default risk low. So, the borrower with the highest default risk is the risky company.