Default occurs when an issuer fails to pay a coupon, repay the principal, or violates other material terms of the issue. There is a distinction between technical default — a delay that can be remedied within the period specified by the contract — and full default, leading to debt collection or restructuring procedures.
Default does not mean that invested funds are entirely lost. Bondholders are creditors and their claims are satisfied before shareholders' claims, so funds are usually partially recovered. The recovery rate depends on the availability of collateral, claim priority, and the outcome of the bankruptcy procedure, and the process itself takes considerable time.
Signs of elevated risk are visible in advance: the issue's yield significantly exceeds market rates, credit rating declines, debt burden indicators worsen, and audit reports include disclaimers. Abnormally high yield is not a gift but the market's assessment of default probability.
For banks, an equivalent is license revocation. Here there is a fundamental difference for individuals: deposits of natural persons are protected by a guarantee system, while investments in securities are not.