Default risk is mainly applicable to which type of security?

• A. Equities.
• B. Bonds.
• C. Futures.
• D. Property.

Answer: (B)

Default risk is the risk that the issuer of a debt security will fail to make interest or principal payments when due. This risk is inherent to bonds, which are debt instruments with contractual promises to pay a fixed coupon and return the principal at maturity. If the issuer encounters financial trouble, those payments can be missed or reduced, leading to losses for the investor. Equities lack fixed payment obligations, so “default” isn’t a primary concern there. Futures are standardized contracts with daily settlement and a clearinghouse that mitigates counterparty risk, so default risk isn’t the main issue. Property itself isn’t a debt security, and while real estate investments can carry other risks, the default concept specifically applies to the issuer’s failure to honor debt payments, which is why bonds are the correct answer.