Busted Bond Definition



What is a bust bond?

Bankruptcy bonds occur when the issuer fails to pay the debtor (or both) the required interest and / or principal.

Important point

  • Bankruptcy bonds occur when the issuer fails to pay the debtor (or both) the required interest and / or principal.
  • Bankruptcy bonds can also refer to convertible bonds whose conversion price is much higher than their market value.
  • In the event of bankruptcy, the bankruptcy bond will be the first obligation paid by the company prior to convertible bonds, preferred stock and common stock.

Understand bust bond

Bankrupt bond issuers who are considered bankrupt must liquidate their assets and repay them to bondholders in order to meet their debt requirements. The term “bankruptcy bond” may also refer to a convertible bond with a small conversion value because the conversion price is much higher than the market value of the underlying security.

In the event of a bankruptcy bond, the issuer is forced to file for bankruptcy because it violated the terms of the debt. Bonds that go bankrupt by default are far less valuable than the discounted cash flow price. Bankruptcy bonds resulting from falling prices of underlying assets, such as convertible bonds, do not violate the terms and conditions. It is less valuable and more like a fund than an equivalent security with built-in options.

Bond contracts are included in the bond contracts required to issue government and corporate bonds. These are legally binding contracts aimed at protecting both issuers and bondholders and outlining the obligations of each party. Two of the basic affirmative terms contained in a bond agreement are that the issuer pays regular interest or coupons on the schedule set out in the agreement and, if the bond is available, at maturity or invoice date. It is a requirement to repay the principal of the bondholder.

The priority of bond payments in the issuer’s capital structure can make bonds more attractive than other asset classes in terms of principal protection. In the event of bankruptcy, the bankruptcy bond will be the first obligation paid by the company prior to convertible bonds, preferred stock and common stock.

Causes of bankruptcy bonds

Bonds can be destroyed in several ways. The most common cause of corporate bonds is when the company’s profits decline and it becomes unable to cover costs, including corporate bond obligations. Revenues can decline due to unfavorable business conditions, intensifying competition, or negative events that generate unexpected costs, such as unfavorable legal decisions. Some companies may be able to accept short-term loans or use existing lines of credit to temporarily fill the shortfall, but in some contracts the issuer takes on additional debt. Is forbidden.

Municipal bonds issued by state, local and other public agencies can also go bankrupt. This can happen if the issuer’s ability to generate revenue is compromised due to a local recession, a lower tax base, or a surge in costs such as civil servant pensions and medical obligations.


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