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.

BREAKING DOWN '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. Credit Default Contract

    Security with a risk level and pricing based on the risk of credit ...
  2. Default

    1. The failure to promptly pay interest or principal when due. ...
  3. Default Risk

    The event in which companies or individuals will be unable to ...
  4. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  5. Bond Insurance

    A type of insurance policy that a bond issuer purchases that ...
  6. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
Related Articles
  1. Personal Finance

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  2. Markets

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  3. Markets

    Junk Bonds’ Performance After the Financial Crisis

    How did higher-yielding bonds perform during and after the financial crisis of 2007-2009?
  4. ETFs & Mutual Funds

    High-Yield Bond ETFs: 3 Reasons to Avoid Them

    Examine high-yield bond performance in 2016. Why do rising default rates, falling recovery rates and Fed rate hikes make these securities worth avoiding?
  5. Markets

    How Credit Rating Risk Affects Corporate Bonds

    Credit migration risk is a vital part of the credit risk assessment, specifically with regard to corporate bonds which underlie numerous rating changes.
  6. Managing Wealth

    Understand the Security Types of Corporate Bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
  7. Investing

    What Happens in a Default?

    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
  8. Markets

    Sinking Fund

    A sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. By eliminating its debt gradually, the bond issuer is more likely to attract investors concerned ...
  9. ETFs & Mutual Funds

    2 ETFs That Will Hurt From Rising Default Rates (HYG, JNK)

    Learn about two high-yield bond ETFs that could be adversely affected if the trend of increasing corporate default rates continues.
  10. Markets

    Emerging Market Defaults: Beware of Second Wave

    Emerging market corporate defaults have the potential to be the biggest risk to global markets.
RELATED FAQS
  1. In the beginning of this year, the total par value of all CCC-rated bonds were $12 ...

    The correct answer is: d) (i) Default Loss Rate = [($1.3 billion - $625 million)/$1.3 billion] = 51.9% (ii) Dollar Default ... Read Answer >>
  2. Is buying bonds on the secondary market safe with what the market is doing?

  3. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  4. What level of default rate is typical for the credit services industry?

    Learn how default rates affect businesses in the credit services industry, and what rates are considered normal for a company ... Read Answer >>
  5. How safe are high yield bonds?

    Learn how high-yield bonds have a greater risk of default than investment grade bonds and why they offer higher amounts of ... Read Answer >>
  6. How important is credit rating on a fixed income security?

    Learn how credit ratings for fixed-income securities impact the yield and provide guidance for the amount of risk for the ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center