DEFINITION of 'Workout Period'

Workout period is the period of time when temporary yield discrepancies between fixed income securities are adjusted. A workout period can be viewed as a sort of reset period, in which bond issuers and credit rating agencies review outstanding fixed income issues and adjust any discrepancies in price/yield, in order to correct any inefficiencies in the market.

BREAKING DOWN 'Workout Period'

Sometimes, the yield relationship among similar bonds is misaligned in the fixed income market. For instance, the yield on two identical bonds with similar coupon and maturity may vary considerably. This mispricing is expected to be corrected during a period known as the workout period. The workout period could be a short time frame or it could be a period equal to the entire duration of the bond’s life, which is the worst case scenario.

During the workout period, the value of a bond held in a portfolio drops as trading continues, and the price is discounted by the expected recovery yield. Investors typically take advantage of the workout period by participating in a bond or sector swap. For example, if an investor believes that the yield spread between two bonds is too wide, his investment would be moved from the higher yielding bond to the lower yielding bond in an attempt to capitalize on the price or yield discrepancy. If the investor has guessed the expected workout period correctly, the investor will have a quick gain from the yield adjustment. Generally, the larger the yield differentials and the shorter the workout period, the greater the return from the bond swap.

The workout period can also be observed in the lending sector. When a loan is defaulted on, the term of the loan will be extended by the lender to allow more time for the lender to recover its debt. During this recovery process, the borrower makes as much repayment as s/he possibly can on the loan. When no more payments can be paid by the borrower or obtained by the lender, the default is deemed to be resolved and the recovery process ends. The period from the default date to the resolved date is the workout period.

  1. Workout Market

    A workout market is a market maker prediction as to the trading ...
  2. Workout Assumption

    A workout assumption is an arrangement by which a third party ...
  3. Workout Agreement

    A workout agreement renegotiates the terms on a loan to provide ...
  4. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  5. Required Yield

    Required yield is the return a bond must offer in order for the ...
  6. Yield Pickup

    Yield pickup is the additional interest rate an investor receives ...
Related Articles
  1. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  2. Investing

    Junk Bonds: A Correction May Be Looming

    Corporate debt issued by companies with riskier balance sheets and lower credit ratings typically carries higher interest rates.
  3. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  4. Investing

    Get Active In Your Bond Portfolio

    Find out why being a couch potato with your bonds actually could be mashing your results.
  5. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  6. Investing

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation.
  7. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  1. What causes a bond's price to rise?

    Should you invest into bonds? Learn about factors that influence the price of a bond, such as interest rates, credit ratings, ... Read Answer >>
  2. Are high-yield bonds better investments than low-yield bonds?

    It depends on the amount of default risk you as an investor want to be exposed to. More yield goes hand-in-hand with more ... Read Answer >>
  3. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  4. Current yield vs yield to maturity

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
Trading Center