Question

A worst case scenario for a bond owner is a default. Some defaults are partial, while others wipe out all value for the investor. Find an article about a bond default and provide your thoughts as to what the main problems were and what could have been done to improve the situation.

Answer 1

Bond is generally issued by a company to solve their liquidity position. When a company issues bonds, it's obligation of company to pay regularly interest payment to bondholders and repay the principal once the bond become due. Whenever company fails to repay the interest amount or principal amount then it is considered as default.

The main reason for bond default are

• sometimes company faces cash flow problem and miss a payment but after a few weeks later company makes the payment.

•Sometimes company default in repayment of bond and file bankruptcy . In this case sometimes Bondholders loose his all money .

There are some strategy that need to follow from company point of view

• Company should make provision for its bond payment liability.

•Company should allow less credit period for debtor and try to realise as soon as possible.

• Company should focus more on cash sale rather than credit sale.

• Company should maintain current ration high to maintain liability position.

There are some strategy that need to follow from bondholders point of view.

• Investor should first check company credibility position before buying and bond.

• Investor can check company credibility with help credit rating agency such as CRISIL, ICRA . These are the credit rating agency that provide rating for company about its credibility. Bond with high rating will consist AAA+ rating that's means company has strong payout against its liability.

• Investor can also check its current ratios which provides guidelines about company liquidity position.