What is meant by default in financial terms?

In financial terms, default refers to a situation where a party fails to meet its contractual obligations, specifically concerning debt payments. This typically means that the borrower does not make scheduled interest or principal payments as agreed upon in the loan agreement. Such a failure can trigger serious consequences, including legal action by creditors, the potential for bankruptcy, or the restructuring of debt.

In the context of this question, understanding default is crucial for evaluating credit risk, as it directly impacts the overall health of financial markets and institutions. Default events affect not just the defaulting entity but also have ripple effects on investors, lenders, and related economic systems.

While the other choices describe related financial situations, they do not accurately define default. Paying off debt signifies fulfilling obligations, restructuring debt refers to modifying terms to avoid default, and being under financial distress indicates potential default but does not constitute it directly. Thus, the definition of default is specifically about the failure to meet debt obligations.