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Definition · Level 7 · Futures, rates & macro
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Failure to pay interest or principal on time, or another breach of a bond's terms. Holders then usually recover only part of par — long-run averages near 40 cents on the dollar for senior unsecured bonds, varying widely.
Example
Missed coupon, grace period expires, restructuring talks: the bonds trade at 35.
Where Tradecraft teaches it
Level 7 · Futures, rates & macro, in the lesson “Bonds: price, yield & credit”: Par, coupon, YTM, the price–yield seesaw, the Treasury menu and credit ratings.
Related terms
- Bills, notes, bondsThe US Treasury maturity buckets: up to 1 year (zero-coupon, sold at a discount), 2–10 years, and 20–30 years (both with semiannual coupons).
- Bond credit spreadExtra yield a corporate or other risky bond pays over a Treasury of similar maturity, quoted in basis points: compensation for default and liquidity…
- Corporate bondDebt issued by a company. It yields a spread over the government bond of similar maturity to pay for default and liquidity risk, and is split by…
- CouponThe interest a bond pays, stated as an annual % of par; in the US usually paid in two semiannual installments.
- Credit ratingA letter grade from S&P, Moody's or Fitch on an issuer's ability to repay: AAA/Aaa at the top, BBB−/Baa3 the lowest investment grade, BB+/Ba1 and…
- Current yieldAnnual coupon ÷ market price: the cash-income return of a bond, ignoring the gain or loss as the price pulls to par at maturity.