What Are Debt Securities

Table of contents:

What Are Debt Securities
What Are Debt Securities

Video: What Are Debt Securities

Video: What Are Debt Securities
Video: Debt Securities And Equity Securities 2024, March
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Debt securities act as an alternative way to raise borrowed funds. Any company can place their free funds in them, for this you do not need to have a special license to provide financial services.

What are debt securities
What are debt securities

Instructions

Step 1

The issue of securities is a tool for attracting financial resources. For an investor, debt securities allow you to receive a specified income for the transfer of funds for temporary use. The issuer can be the government and legal entities. This principle distinguishes between government and corporate securities.

Step 2

The main volume of trading in securities is carried out on the over-the-counter market, namely through electronic trading systems. The volume of trading in the debt market is an order of magnitude higher than in the stock market, as they are purchased by many institutional investors, governments and NPOs.

Step 3

For investors, the advantages of investing in debt securities lie in the absence of the need to monitor the dynamics of their market value, since the yield on them is already known in advance. As a rule, the profitability on them is higher than on bank deposits. Also, debt obligations are classified as liquid securities, since they can be easily sold, pledged, borrowed or bequeathed.

Step 4

Most often, debt securities are issued in the form of bills of exchange and bonds, which serve as evidence that one person has transferred to another a certain amount of money at a specified percentage, which must be returned by a specified date. The differences between promissory notes and bonds are insignificant, but it is generally accepted that promissory notes are short-term securities with a maturity of up to a year, while bonds are long-term.

Step 5

Bonds are a security that serves as evidence of the borrower's receipt of a certain amount for a specified period with an annual interest payment. Bonds are very popular among issuing companies. This is due to the fact that they are a more economical way of raising borrowed funds than issuing shares. Bond income is paid from the company's pre-tax profits, and share dividends are paid from net income net of taxes. Investors with a conservative strategy choose bonds as a way of investing. They are considered to be a safer investment than stocks. But, nevertheless, there are risks when buying bonds. So, for example, despite the high interest rate on Greek government bonds (27%), investors are in no hurry to purchase them due to the high risk of default in Greece (refusal to meet their debt obligations). There is a pattern that high-risk bonds have higher interest rates.

Step 6

A bill of exchange is the obligation of the borrower to pay a specified amount to the holder of the bill at a specified time and place. Bills of exchange can be simple and transferable. For promissory notes, payment is made to the holder of the bill, for bills - to another person who is indicated in the bill. A bill of exchange can be written out by both a legal entity and an individual. At the same time, the presence of state registration is not required, which distinguishes the bill from other securities.

Step 7

In addition to promissory notes and bonds, there are such securities as savings certificates, mortgage sheets, IOUs, etc.

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