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. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...
RELATED FAQS
  1. Where can I find year-to-date (YTD) returns for benchmarks?

    Benchmarks are securities or groups of securities against which investment performance is analyzed. Examples of popular equity ... Read Full Answer >>
  2. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  3. Under what circumstances would someone enter into a repurchase agreement?

    In finance, a repurchase agreement represents a contract between two parties, where one party sells a security to the other ... Read Full Answer >>
  4. What type of asset allocation should I use if I am already retired?

    Among investors, asset allocation is a topic of discussion that receives a great deal of weight during the asset accumulation ... Read Full Answer >>
  5. What happens to the price of a premium bond as it approaches maturity?

    The price of a premium bond will decrease toward par value as the bond approaches maturity. Premium Bonds Vs. Discount Bonds All ... Read Full Answer >>
  6. What is the importance of calculating tax equivalent bond yield?

    Fixed-income investors measure portfolio returns using yields. Since most bonds do not produce high returns like equity markets, ... Read Full Answer >>
Related Articles
  1. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  2. Bonds & Fixed Income

    Are High-Yield Bonds Too Risky?

    Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio.
  3. Personal Finance

    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.
  4. Personal Finance

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  5. Bonds & Fixed Income

    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.
  6. Bonds & Fixed Income

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  7. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  8. Stock Analysis

    Playing Rising Rates with Ultra-Short Term Bonds

    With rising rates likely, investors may want to consider adding a dose of ultra-short bonds to their portfolios. Here are some ETFs to consider.
  9. Professionals

    Why Investors Are Bailing on Bond ETFs

    Investors are fleeing bond ETFs. Should you follow the herd? Hint: It depends on the type of bond.
  10. Professionals

    Is a Bond Market Selloff Coming?

    A big investment management company is concerned about bond market conditions and allocating more capital to cash. Should you follow?

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!