what are distressed securities 
distressed securities are financial instruments issued by a company that is near to or currently going through bankruptcy distressed securities can include common and preferred shares bank debt trade claims and corporate bonds a particular security can also be considered distressed if it fails to maintain certain covenants obligations incorporated into the debt or security such as the ability to maintain a certain asset to liability ratio or a particular credit rating as a result of the issuing company s inability to meet its financial obligations their financial instruments suffer a substantial reduction in value however because of the implicit riskiness of distressed securities they can offer high risk investors the potential for high returns understanding distressed securitiesdistressed securities often appeal to investors who are looking for a bargain and are willing to accept risk in some cases these investors believe the company s situation is not as bad as it looks and as a result they anticipate their investments will increase in value over time in other cases investors may foresee the company going into bankruptcy however they feel confident that there might be enough money upon liquidation to cover the securities they have purchased in many cases the companies that issue distressed securities end up filing for chapter 11 or chapter 7 bankruptcy as a result individuals interested in investing in these securities need to consider what happens in the case of bankruptcy in most bankruptcies equity such as common shares is rendered worthless this makes investing in distressed stocks extremely risky however senior debt instruments such as bank debt trade claims and bonds may yield some payout in particular if a business files chapter 7 bankruptcy it will stop operations and go into liquidation at this point its funds are dispensed to its creditors including bondholders conversely under chapter 11 bankruptcy a business restructures and continues operations if reorganization is successful its distressed securities including both stocks and bonds may yield surprising amounts of profits example of a distressed securitysecurities are labeled as distressed when the company issuing them is unable to meet many of its financial obligations in most cases these securities carry a ccc or below credit rating from debt rating agencies such as standard and poor s or moody s investor services distressed securities can be contrasted with junk bonds which traditionally have a credit rating of bbb or lower typically the anticipated rate of return on a distressed security is more than 1 000 basis points above the rate of return of a so called risk free asset such as a u s treasury bill or treasury bond for example if the yield on a five year treasury bond is 1 a distressed corporate bond has a rate of return of 11 or higher based on the fact that one basis point equates to 0 01 