Question about bonds, not necessarily CFA question interest, question, principal, difficulty, payments

prav_Cfa7

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?

orang3eph

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.

Chuckrox

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.

Kapie

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?