Series 50: Default

Taken from our Series 50 Online Guide

Default

When a municipal entity fails to make an interest payment or a principal payment, it is considered to be in default. Defaults can be caused by a wide range of events, from economic issues like depressions and recessions, to fraud and mismanagement of money, to natural disasters.

Securities are also considered to be in default if the issuer has applied for bankruptcy. Defaulted securities trade in the secondary market without accrued interest. This is called trading flat.

Additionally, default can result if an issuer does not meet the terms of a bond covenant.

When a default is caused by failure to make an interest or principal payment, this is known as monetary default. When the default is caused by failure to abide by a bond covenant or other requirement, it is known as a technical default.

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