Temporary Default

AAA

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 TERMS
  1. Sovereign Default

    A failure on the repayment of a county's government debts. Countries ...
  2. Sovereign Credit Rating

    The credit rating of a country or sovereign entity. Sovereign ...
  3. Default

    1. The failure to promptly pay interest or principal when due. ...
  4. Bond Rating

    A grade given to bonds that indicates their credit quality. Private ...
  5. Bailout

    A situation in which a business, individual or government offers ...
  6. Treasury Direct

    The online market where investors can purchase federal government ...
Related Articles
  1. Credit Default Swaps: What Happens In ...
    Insurance

    Credit Default Swaps: What Happens In ...

  2. Are High-Yield Bonds Too Risky?
    Bonds & Fixed Income

    Are High-Yield Bonds Too Risky?

  3. When To Trust Bond Rating Agencies
    Personal Finance

    When To Trust Bond Rating Agencies

  4. The Debt Ratings Debate
    Personal Finance

    The Debt Ratings Debate

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center