restructure unsustainable debts via the issuance of so-called “Brady bonds.” Under Brady exchanges, creditors accepted face value and net-present value (NPV) haircuts in exchange for greater assurances about debtors' capacity to repay, while debtors used the debt relief provided to restore debt sustainability and ...

The key innovation behind the introduction of Brady Bonds was to allow the commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to those banks.

Commercial banks and lenders use Brady bonds to convert default loans into zero coupon bonds which they collateralize and store in the U.S. Fed until maturity. At maturity, either bank sells off the bond for loan payment, or the borrowers pay the principal to the lender.