What is Debt Security?
Even though debt securities are all similar in some way, there is a difference regarding the type of institution that initiates the security at hand.
Debt securities can be used as a method of making payments to your investments, without leaving money in a savings account.
It allows an institution to borrow large amounts of money from investors, while in return, repaying the loan against an interest rate. Whenever corporations, banks or governments need to raise some money, to continue with business, they could either sell the ownership of their equity for stock, which requires them to give up their ownership within a company. Another option is creating debt securities, such as bonds, to support the investment at hand.
Bonds as the main option for debt security.
Bonds can be presented in many different forms, which again, gets distinguished, depending on the institution it comes from.
These institutions generally sell bonds to investors, to make a profit on interest payments, during the entire period the bond gets paid off in. Bonds issued by the government, are known as governmental bonds, and those issued by the state, municipal bonds, as well as corporations that issue corporate bonds, which are all taken out to raise money, with the intent to fund operations.
Government bonds primarily act as the benchmark for interest rates, which applies to debt securities.
Types of Debt Securities
- Bonds and medium-term notes – Bonds and notes are issued once off, or on a repeated programme basis. When issued under a program, they are listed as medium-term notes.
- Commercial paper (CP) – These are short-term debt securities and refer to a period of 365 days of relevance in the market.
- Interest-bearing securities – These debt securities have interest payments that should be made regularly, such as interest on loans, debt security that is either fixed, variable or fixed.
- Zero coupon securities – This type of debt security doesn’t have interest but get issued at a discount for its value. When redeemed by an investor, its issuer pays the full value of the security.
- High-yield securities – Also referred to as yield bonds, these are issued by individuals that are non-investment grade issuers and pay higher interests that investment-grade bonds.