Due to their reduction in value, distressed securities often become attractive to investors who are looking for a bargain and are willing to accept a risk. Because most of the time these companies end up filing for Chapter 11 or 7, there are substantial risks involved in investing in them. As a result of bankruptcy, equity (common shares) is rendered worthless so those who invest depressed securities look at more senior instruments such as bank debt, trade claims and bonds.
The logic behind this investment is that the company's situation is not as bad as the market believes it to be and either the company will survive or there will be enough money upon liquidation to cover the original investment.
Investment dictionary. Academic. 2012.
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