Debt Securities: Definition & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Options Basics: Stocks, Payoffs & Puts & Calls

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:04 Debt Securities
  • 0:43 Bonds
  • 1:54 Preferred Stock
  • 2:27 Certificates of Deposit
  • 3:06 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed Audio mode

Recommended Lessons and Courses for You

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.

Bonds

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.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support