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All About Debt Securities

written by: Tim Plaehn•edited by: Donna Cosmato•updated: 1/9/2011

The investment world can be broadly divided into equity and debt securities. Equity is the stock market, and debt is bonds and other forms of borrowing money. Debt securities should have a place in every investor's portfolio.

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    What Are Debt Securities?

    Debt securities are marketable instruments used by issuers as a source to borrow money. An organization that wants to borrow money can borrow from a bank or elect to sell debt securities into the bond market. Debt securities typically pay investors a fixed rate of interest, and the face amount will be payable at maturity. As securities, these bonds trade on the secondary market where values are determined by the rates of interest and the credit standing of the issuer.

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    Debt Securities Advantages

    Debt securities are issued by large corporations, the federal and local governments. The securities provide a predictable rate of interests and a set maturity date. Thus, any investor can plan his financial activities accordingly.

    • Risk is minimized, compared to stocks whose market values fluctuate widely. Principal amount is guaranteed to be returned on maturity, or when the debt security is sold.
    • They can be utilized as leverage for other investments.
    • They provide an additional option for investment.
    • Enhanced liquidity is available, since trades executed of debt securities are much greater than stocks.
    • There is an availability of fixed and predictable rate of interest, which is normally more than the interests paid by banks. Therefore, both the issuer and investor are well aware of the financial details, due to which the principal amount and interest can be more beneficially utilized by issuer and investor respectively.
    • It is more convenient if an investor has neither the skills, time, or aptitude to trade in stocks. Trading in stocks is much more difficult, since their fluctuations, volumes, high and low values, and other financial information has to be studied more meticulously to be successful.
    • Debt securities issued by government may be utilized to implement monetary policies, concerning maintenance of liquidity and rate of interest, according to economic strategies.
    • Many options are available in debt securities for the purpose of investment, and their categories are as under:
      • Tenure of debt securities, medium or long term.
      • Face value, starting from $ 1000.
      • Mode of payment, monthly, six monthly, or annually.
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    Types Of Debt Securities

    Bonds: These are debt securities with a fixed interest rate and maturity period, which are issued by government or corporations. The interest rate of bonds issued by the federal government will have a lower interest rate when compared to corporate bonds and is a basis of financial resource for government. Bonds issued by corporations are the debt of business concerns.

    Debentures: These are originated by companies, in which interests of the investor are secured by trust deed, which enforces certain restrictions on the borrower.

    Capital Notes: This is a debt, the ranking of which is behind other creditors, and if liquidation occurs, other creditors have preference to get their investment back first, compared to holders of capital notes.