The Bond I Invested in Defaulted: What Should I Do?
What Investors Need to Know When a Bond Fails to Pay
Investing in bonds is often seen as a safer, more stable alternative to stocks. But what happens when a bond — an investment typically associated with reliability — defaults? If you're reading this, it's likely you're dealing with this very situation. First of all: don’t panic. While a bond default is certainly serious, there are steps you can take to understand the situation, limit your losses, and possibly recover part of your investment.
What Does It Mean When a Bond Defaults?
A bond default happens when the issuer — a company, municipality, or government — fails to make the required interest payments or repay the principal at maturity. This can occur for several reasons, such as cash flow problems, poor financial management, or broader economic downturns.
There are two types of bond default:
Technical Default: The issuer violates some term of the bond contract (covenant) without missing a payment — for example, failing to meet certain financial ratios.
Payment Default: The issuer fails to make a scheduled interest or principal payment.
Regardless of the type, a default usually results in the bond’s market value plummeting and can lead to lengthy legal or restructuring processes.