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Debt Securities

Ivan Kennedy, Ian Lord
  • Author
    Ivan Kennedy

    Ivan Kennedy has experience teaching College-level Business Management for the last 4 years. He has an MBA from the University of Kansas and a Bachelor’s degree in Business Economics. He has work experience in Business and Finance and he can relate well to any such related material.

  • Instructor
    Ian Lord

    Ian is a 3D printing and digital design entrepreneur with over five years of professional experience. After six years of aircrew service in the Air Force, he earned his MBA from the University of Phoenix following a BS from the University of Maryland. He is also a real estate investor, board gamer and homebrewer.

Learn what debt securities vs. equity securities are. Examine the types and examples of securities, and identify the risks and benefits of debt securities. Updated: 04/11/2022

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What Are Debt Securities?

Debt securities is a financial term used to describe the debts that can be purchased or bought amongst market players before they attain maturity. They are financial instruments that have the promise of payment by the issuer to the holder at an agreed amount of money at a particular time, which is usually the point of maturity of the financial instrument. They can also be described as financial assets used to raise an entity's debt upon being invested. Therefore, debt securities are precisely a representation of borrowed money that is due for payment at a particular interest rate based on the loan size and the maturity or renewal date.

Debt securities have a negotiability feature which makes their transferability easy amongst parties. Private investors or the government buys debt securities since they are usually in large sizes, with the expectation of repaying the principal amount alongside a periodic interest. The sale of debt securities is helpful to the government or investors as it enables them to raise funds for various projects like a business expansion for business owners and the provision of public services by the government. For instance, the U.S government-issued debt securities in the form of bonds when World War II was taking place in a bid to garner funds for military support.

Therefore, the issuance of debt securities is tied to the need to raise funds by investors or the government. This is because debt security, like a bond, acts as a loan grant between two parties, the investor and the entity purchasing it, where the investor gives the buying entity an amount of money payable after an agreed period, and the investor is repaid periodically at a given interest rate.

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Debt Securities vs. Equity Securities

Equity securities vary in many ways from debt securities. Both are financial securities but are different from each other in their features, examples, and many other ways. Below are some of the differences between both financial securities.

  1. Debt securities depict a loan issued to a company or corporation intending to raise funds towards meeting its objectives like funding a project. In contrast, equity securities describe the shares and claims a company owns regarding its assets, capital stock shares, and earnings.
  2. Debt securities have a date when they are set to mature because it shows that on that date, the investors expect to receive their principal alongside the agreed interest rates. This is when the investor's money to the entity that purchased the security expects to receive the money they gave to the entity as a loan. However, equity securities do not depict a maturity date because they are in the form of stocks that do not really mature. Equity securities are merely a representation of the shares of an organization or business entity, and therefore no maturity date is attached to an entity's shares.
  3. Debt securities have their returns in the form of interest payments where the buyer of the security pays the investor a higher rate than the principal or borrowed amount, which acts as the interest rate. Conversely, equity securities have dividends and capital gains as their mode of payment, where shareholders receive their investment funds in dividends paid periodically as agreed.
  4. Debt securities do not provide for voting rights in which the buyer of the bond can have rights to the decision-making pattern of the security and vice versa. In contrast, equity securities provide voting rights where shareholders have the capacity to make decisions regarding the company's operation.

Features of Debt Securities

  • Maturity date. The maturity date describes the time when the security issuer is bound to repay the borrowed amount and the attached interest. It is categorized into short and long term, where securities maturing in a year are deemed to be of short-term maturity. Long-term maturity describes securities maturing in more than three years. The securities that mature between one and three years are deemed to be of medium-term maturity. Long-term maturity securities allow investors to demand more returns from the investment and vice versa.
  • Yield to maturity. The yield to maturity is an annual expression of the rate of return that an investor expects to receive at the security maturity. YTM is important in its ability to enable investors to differentiate and compare securities and their respective expected returns.
  • Coupon rate. The coupon rate is the interest rate that an investor expects to receive as income upon maturity of the security they are holding. The coupon rate is usually fixed upon issuance of the debt security. It is calculated by performing a division between the summation of the coupon payments through the period and the par value. However, the coupon rate may not always be fixed throughout the security's life but may vary based on prevailing economic conditions.
  • Issue date and issue price. The issue price is the monetary value attached to the debt security or the amount at which investors purchase the security on the issued date. On the other hand, the issue date is the day when the security is purchased or sold.

Examples of Securities

Securities are categorized into two distinct forms; debt and equity. Debt securities are subdivided into government, corporate, and municipal bonds. Government bonds are loan grants or financial obligations that the national government provides for use as a source of funding for the expenses of the government. Government bonds have the backing of the federal government in full faith and credit, which means that the government pledges to pay the obligation on time. Government bonds usually depict lesser interest in comparison to corporate bonds because of the minimal default risk. Examples of these are treasury notes, treasury bills, zero-coupon bonds, municipal bonds, and treasury bonds.

Corporate bonds describe the securities that corporations issue to willing buyers. Corporate bonds depict higher interest rates than U.S government bonds due to the higher risk of default associated with them. The credit rating determines the interest rate to be charged because it shows the subsequent default risk. Examples of these are convertible bonds, callable bonds, junk bonds, and investment-grade bonds.

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Frequently Asked Questions

What are different types of debt securities?

Debt securities are categorized into corporate bonds, municipal bonds, government bonds, treasury bonds, treasury notes, treasury bills, commercial paper, certificate of deposit, and savings bonds.

Why are debt securities issued?

Debt securities are issued as loans to entities seeking to raise funds as a source of garnering money for projects or public service provision, in the case of the government.

Why are bonds called debt securities?

Bonds are deemed debt securities because they involve the issuance of bonds by borrowers to willing investors. These might be corporations or governments aiming at raising funds and repayment is to be done after a fixed period.

Are debt securities a good investment?

Debt securities are a good investment because they provide regular periodic payments to investors. This enables investors have a steady flow of income. They also provide for portfolio diversification to investors which is good for risk mitigation.

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