How to Calculate a Default Risk Ratio

A default risk ratio is important for a small business because a bank will look at this to determine the level of risk associated with a possible loan. Learn about default risk ratios against zero risk ratios with help from two accountants in this free video on business calculations and accounting.

Part of the Video Series: Business Calculations & Accounting

Video Transcript

Hey there, my name is Spence with Account Teams, we're in Salt Lake City, and we help people do accounting and help them with taxes. And we have a lot of small businesses that bring just piles of records in, and are lost, and we help get them through that problem. Today I'm talking to you about the default risk ratio. For a small business, this is important because a banker will look at this if he's lending you money to see how much risk he has in what he has to offer. Also, if you're investing money, and you're buying, for example, bonds from a company, the, you should look at that compared to a zero risk ratio. Now, the only zero risk people consider in this country is notes from the federal government. They're considered zero risk, and if they're going for four percent, and you have a large company that's selling bonds at eight percent, then the ratio would be four over eight, or fifty percent, but if the not such a solid company, and they're offering sixteen percent, then in that case, you've got four over sixteen, and it's a lot harder ratio, they offer more money, but there's a lot more risk because they have to do it that way. If you're worrying about how the money's at risk, and you're not worried about how much money you make, then this default ratio would be important.

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