Temporary Default
 |
Definition of 'Temporary Default'A bond rating that suggests the issuer might not make all of the required interest payments, but is taking actions to avoid a full default.Temporary default describes the credit worthiness of a debt issuer that has a high likelihood of defaulting on the debt, but is working to meet the payment obligations in the contract. This situation indicates a potential default of principal, interest or both. Investors in these bonds might only see a delay in payment. However, if the temporary default continues for long enough, the credit rating of the issuer could be negatively affected in a permanent manner. |
 |
Investopedia explains 'Temporary Default'A high credit rating means that a company, country or issuer will pay lower interest. If a bond is placed in a temporary default, the borrower is seen as more risky, so a higher interest rate must be given to compensate future investors.During this stage, investors may be given the option to exchange their current bonds with ones that have lower yields and longer payment periods. This deal is attractive to investors because the investors are aware that the current bonds issued are likely to be defaulted on. Moreover, it gives investors a greater opportunity for returns. A bond exchange also allows the issuer to improve its debt rating by having more time to pay debt at a lower rate. The bond rating company takes into account that steps are being made to avoid default. Even though there is still a chance of default, the issuer is no longer in as much jeopardy of a true default. In this case, a temporary default rating is awarded. |
Related Definitions
Articles Of Interest
-
Are High-Yield Bonds Too Risky?
Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio. -
When To Trust Bond Rating Agencies
Despite investor distrust, rating agencies can be helpful. Just be sure you use these ratings as a starting point. -
The Debt Ratings Debate
Lack of competition and potential conflicts of interest have called the value of these ratings into question. -
Why Bad Bonds Get Good Ratings
Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short. -
5 Basic Things To Know About Bonds
Learn these basic terms to breakdown this seemingly complex investment area. -
Credit Default Swaps: What Happens In A Credit Event?
The credit crisis of 2008 prompted important changes to the settlement of credit default swaps. -
Why Your Pension Plan Has Sovereign Debt In It
One type of security pensions tend to invest in is sovereign debt, or debt issued by a government. -
6 Popular ETF Types For Your Portfolio
Exchange traded funds are an extremely popular diversification tool that can protect your portfolio during troubled periods. -
Top 5 Budgeting Questions Answered
You don't need a degree to understand your money, begin saving and pay down debt. -
Asset Allocation: The First Step Toward Profit
Understanding the different asset classes is an essential part of portfolio diversification.
Free Annual Reports
