Commonly used to describe loans, bonds other debt instruments that are issued by a borrower that has a high risk of not being able to service its existing interest or repayment obligations.

Distressed bonds for example would normally trade at a significant discount to ‘par’. This can present an interesting investment opportunity for those who believe that the performance of a company will improve or the liquidation value of a company exceeds the price at which the debt security is available to be purchased.