Assessing Default Risk on Bonds

If the bonds I hold are in default because of the issuer’s bankruptcy, might I still be able to retrieve my principal?

It depends on what type of bond you purchased. It is very important to understand that, in general, the higher the interest rate and return you are promised, the higher the risk of something adversely happening to your principal, even if you buy a bond that is highly discounted from its face value. You must read the fine print and consult an expert financial adviser before you enter into a bond-based investment. Since bondholders or owners are creditors to the bond issuer, they are treated with a higher priority than stockholders or equity owners of the same company or corporate entity when it comes to getting paid after a bankruptcy/restructuring event/liquidation, when all assets of the entity are sold to pay off creditors. When a bond issuer defaults during a bankruptcy, the priority of who is to be paid is determined by the type of bond held or owned.


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