Generally speaking, it is the possibility that firms or individuals would fail to honor their contractual obligations on their borrowed money. For example, default risk may refer to the case when a bond issuer fails to timely repay principal and due interest to bondholders. Debts issued by solvent governments are said to be free from default risk because the government has the ability to print fiat money at times of need and also can secure funds by collecting taxes.
In the context of derivatives, it is the probability that a party to a derivative contract (e.g., a swap or derivative instrument/ structured instrument) will not be able to meet its respective obligations, either partially, fully or timely. This involves a situation where interest/ principal payments or swap payments will not be made as per schedule.
The default risk is also known as a credit risk. However, in specific contexts, default risk is treated as part or subcategory of the credit risk.
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