Bond Default
A bond default occurs when an issuer fails to make a scheduled interest or principal payment as specified in the bond indenture.
What is Bond Default?
A bond default occurs when an issuer fails to fulfill its contractual obligations under the bond indenture—most commonly by missing a scheduled interest (coupon) payment or failing to return principal at maturity. Technical defaults can also be triggered by covenant violations, failure to maintain required credit ratings, or cross-default provisions (which accelerate other debt if one obligation defaults). When a default occurs, bondholders may negotiate a restructuring, receive partial repayment through bankruptcy proceedings, or sell their claims in the secondary market at distressed prices. Recovery rates—the percentage of face value recovered after default—vary widely by seniority, industry, and economic conditions.
Example
Argentina has defaulted on its sovereign debt multiple times; its 2001 default—at $100 billion—was the largest sovereign default in history at the time. After years of negotiations, holders of defaulted Argentine bonds ultimately received approximately 30–35 cents on the dollar in exchange offers, illustrating the significant haircuts investors can face in sovereign defaults.