Notices

Debt

From Traderpedia

Definition:
In the financial market sense, a security or instrument which requires the issuer to pay the holder/buyer a specific amount (either fixed or by formula) at one or more points in time.


Contents

[edit] Types of Debt

[edit] Bond

A bond is a debt instrument that obligates the issuer to pay to the holder the principal (the original amount of the loan) plus interest. Bonds, in theory, are collateralized by a specific asset or set of assets.

[edit] Debenture

A debenture is a long term debt instrument. It is similar to a bond except that it is unsecured. There are no liens or pledges on specific assets, but rather is secured by all properties not otherwise pledged. In the case of bankruptcy, this makes debenture holders general creditors.

In market practice the distinction between bond and debenture is not always maintained. Bonds are sometimes called debentures and vice-versa.

[edit] Mortgage

A mortgage is a specific type of bond. It is one which is collaterized by real estate. Technically, a mortgage comprises two parts. One is the promissory note which is the actual debt instrument. The other is the pledge of the property as security in the case of default.

[edit] Credit Ratings

Debt of countries, municipalities, agencies and private corporations is rated by one or more rating agencies. These agencies make assessments the ability of the debtor to honor the obligations of its debt. The result is a credit rating.

Changes in credit ratings can have a major impact on an issuer, as its cost of refinancing depends on its creditworthiness. Bonds rated below Baa/BBB (Moody's/S&P) are considered junk or high risk bonds. Their high risk of default is compensated by higher interest payments.

Bad Debt is a loan which can not (partially or fully) be repaid - considered a default. These types of debt are frequently repackaged and sold below face value.

[edit] Rating Agencies

  • Moody's
  • Standard and Poors (S&P)
  • A.M. Best

[edit] Rating Designations

The different rating agencies use varied rating designations. Moody's uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by numbers 1-3. A company, for example, could be rated Aa3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers.

[edit] Debt Terms

amortisation