Debt securities are used as 'promises' from the issuer that they will pay the holder a certain amount by the point at which debt security matures. Keep reading for our guide to debt securities and how they are used.
Debt securities definition
Debt securities refer to debts that are bought or sold between parties before debt security matures. Ownership of debt securities can be transferred relatively easily. A famous example of debt securities is bonds - this can be corporate, municipal, or government bonds. Other examples of debt securities include preferred stock, collateralized debt obligations, euro commercial paper, and mortgage-backed securities.
Debt securities share several common features to look out for. Firstly, the issue date and price refers to the date and price of the initial issuing of the debt security. Second, the maturity date - this identifies the date the issuer needs to pray the interest. The length of a maturity term will affect the price and interest rates. Then, there is the coupon rate. This refers to the interest payments the issuer needs to provide. This can be a fixed rate or dependent on inflation and the economy. Last but not least, there is the so-called yield-to-maturity. This describes the annual rate of return investors can expect to earn.
You might have come across the term 'equity securities'. This refers to a claim on the assets and earnings of a business. Debt security, on the other hand, is more of investments in debt instruments. Equity securities do not provide guaranteed dividends.
Impairment of debt securities
Impairment is another concept in the world of investment. It describes the reduction in the value of an asset due to a decline in its quantity, quality, or market value. It means you have to account for any impairment losses on your company’s profit and loss account. This can be done by comparing the recoverable value of the asset with its book value before impairment.
Debt securities - advantages
For an investor, debt securities help the repayment of their initial investment, plus interest before security matures. This means they provide guaranteed, regular payments through interest. For investors, they can also be an effective way of diversifying your portfolio, helping you manage risk.