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When debt obligation are not being met by the companies, Lenders and investors are exposed to default risk. In most of the experience, to cover the risk lenders suppose to charge interest on their lendings. For extention of loans, or to advance more money, the lenders or investors calculate some ratio's to check the payout position of the company and take the necessary decisions.
The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. To mitigate the impact of default risk, lenders often charge rates of return that correspond the debtor's level of default risk. The higher the risk, the higher the required return, and vice versa.
