Debt Securities: Definition & Examples

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  • 0:04 Debt Securities
  • 0:43 Bonds
  • 1:54 Preferred Stock
  • 2:27 Certificates of Deposit
  • 3:06 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

While they share similar attributes, debt securities vary by the type of institution that creates them. In this lesson, we'll review how institutions use debt securities to finance operational activities.

Debt Securities

Gabe is looking for investment options that offer consistent payments and higher interest payments than he would earn by leaving his money in a savings account. Debt securities are one option that Gabe can utilize to grow his money.

Debt securities allow an institution to borrow money from investors and repay the loan with interest. When institutions such as banks, corporations, or governments need to raise money to conduct business, they have two primary means of doing so. First, they can sell equity in the company in the form of common stock, whereby investors share in the ownership of the company. Another option is to create debt securities.


Gabe knows a little bit about bonds, primarily from receiving a few savings bonds from his grandparents as gifts when he was younger. Bonds come in a variety of forms and are largely distinguished by the issuing institutions, which promise to make periodic interest payments until the value of the bond is repaid in full at a future date. Government bonds are issued by the federal government. They often act as a benchmark for the interest rates on debt securities and are backed by the credit and full faith of the U.S. government. This makes the risk of default highly unlikely, since the government can always raise taxes or cut spending in order to make the payments.

Municipal bonds, or muni bonds, are issued by state and local governments and might have a higher interest rate since there's more risk involved. Corporate bonds are issued by companies to raise money to fund their operations. Like municipal bonds, they too may be associated with more risk and therefore offer a higher interest rate.

If Gabe is making an investment that's riskier than depositing money in a savings account or even a federal government bond, he expects a bigger return. The more risky the security, the higher the interest rate needs to be in order to attract investor dollars.

Preferred Stock

Instead of creating pure debt securities, a corporation can instead create shares of preferred stock. The corporation raises money by selling these equity shares, which also attract investors such as Gabe who want guaranteed payments. Preferred stock are different from common shares in that, unlike common stock, they come with a fixed dividend payment. The result is a combination of debt and equity, as the shareholders not only own equity in the company but also are entitled to the fixed dividends periodically paid out by the company.

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