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Question about bonds, not necessarily CFA question

Lets say I buy a $1000 bond for 80% of par value. The debtor is having a rough time and is having difficulty making interest payments and is distressed.

At the end of the bond’s term, would the owner of the bond get a principal pay back of $1000, $800 or would the lender and borrower work out some kind of principal payoff agreed upon by the two parties?

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Are we talking about a bond or a loan?  This sounds like you are mixing bonds and troubled debt resturcturing into one problem.  I’m not sure how many bond holders directly negotitate with the borrower, unless they own a huge amount of the bond.  May want to post questions like this in the “Investments” section.

I think it would depend. If the borrower is actually on the verge of default, then the lender would lose his investment right ? Look at the problems in Greece, I do not want to simplify the Greek problem as it is extremely completed, but lenders had to agree to an haircut which reduced the actual value of the debt. If we consider that Greece had difficulty respecting its debt repayment deadlines, then we could say that it is possible for the lender and borrower to come to certain agreements concerning bond principal repayment. This is an overly simplified example though. Anyone please correct me if I am wrong. 

sharpie20 wrote:

At the end of the bond’s term, would the owner of the bond get a principal pay back of $1000, $800 or would the lender and borrower work out some kind of principal payoff agreed upon by the two parties?

Missing interest payments is technically a default (even if everything is subsequently paid back in full). In theory any departure from the scheduled payments (principal and coupons, if any) laid out in the indenture renders default. This might be paying today’s coupon next week, or not having enough liquidity to pay back par.

In your example, the issuer owes $1k in principal. If it declares default, the bondholder may have a claim on the issuer’s assets. The extent will depend on the seniority of the issuance. Secured or guaranteed bonds will claim more than subordinated debentures. In short, the lender will be owed $1k, but what he will actually get will depend on the features of the bond (all specified in the indenture) and the capital structure of the issuer.

If you’re asking whether distressed borrowers do normally get away by paying back the actual amount borrowed (ie. price) rather than that owed (face+coupons), then the short answer is no, not at all.

Agreee to all that orang3eph has said.

In addition, in case you are asking that - will the investor get $800 back since he bought the bond for $800? - then the answer is no, he is entitled to $1000 - full par value (and of course the coupons).
 
Practically, there have been cases of cognizant default, where the issuer and investor agree that the coupon payment will be paid late - to take care of liquidity or other issues. But, this may work only with loans or where the number of bondholders are limited or known.

Certified FRM, CFA L2 Candidate

Also, I believe that with government bonds, like the one in Greece, holders of the bonds could be olbiged to take a haircut on the bond entitlement once it matures. If all bonds were 100% safe and were all guaranteed repayment, then there wouldn’t be much difference in the yeilds, apart from of course the interest rates in those countries.

plumber > stripper > experience > CFA > MBA

Only way for a bondholder to get back only 800 is through some sort of restructuring. When you buy a bond a 80% bond value it just means that your coupon is less than the yield. To compensate for it, the bond must be priced lower (no one would buy the bond at par value if the coupons are lower than the yield, theortically). Therefore, changes in the yield and risk has little to do with the ending face value (other than if the company goes into default or the debt is restructured).

What’s happening in Greece is that the government is “threatening” the bondholders. Greece is saying that if we have to pay the full amount, we wouldn’t have the money and you wouldn’t get anything (default). Therefore they’re restructuring it so the bondholderes are getting less than the par value. 

And with the sovereign bonds, you are just backed by faith right.. You cant do anything to claim back if a country defaults on its bonds. Opinions?

Best regards,

Sooraj.