Debt Securities
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Table of Contents
Features of Debt Securities
Debt securities are fixed rate instruments issued to raise funds and their basic terms, such as the notional amount and the maturity period, are decided in advance. The interest rate on debt securities is determined by the perceived repayment ability of the borrower. Some examples of debt securities are municipal bonds, zero coupon securities, government bonds and collateralized securities.[br]
Features of Debt Securities
Debt securities are considered to be safer than equity instruments but riskier than cash. They have certain basic features:
ü The interest rate on them is fixed and paid on a regular basis.
ü The maturity period is decided in advance and the principal amount returned at the end of that period.
ü Most of these securities are traded over the counter.
ü The interest rate is determined by the repayment ability of the borrower.
ü The holder of these securities is entitled to receiving the principal and the interest from the issuer besides other pre-decided contractual rights.
ü They can be secured or unsecured.
ü They can be issued in tranches with each tranche representing varying levels of risk and returns.
ü They do not carry any kind of voting rights.
Types of Debt Securities
Debt securities can be distinguished on the basis of the issuer and their maturity period.
ü Corporate Bonds:These types of securities are issued by commercial and industrial entities and can take the form of debentures, notes or commercial paper. While debentures are issued for longer periods, such as ten years, notes have a shorter maturity. Commercial Paper is the simplest form of short term security with its maturity period not extending beyond 270 days.[br]
ü Money Market Instruments: These are short term debt instruments that are highly liquid. Examples include certificates of deposit and certain types of bills of exchange.
ü Euro Debt Securities: These debt securities are issued in the international market and their denomination is different from that of the issuer’s domicile. They can be Eurobonds or Euronotes.
ü Government Bonds: These are medium to long term securities issued by the government and its agencies and carry lower rates of interest.
ü Sub-Sovereign Government Bonds: These are debt securities issued by the states, municipalities, provincial or other territorial units.
ü Supranational Bonds: These are issued by international agencies like the World Bank and the International Monetary Fund to raise funds for their various projects.
