With growing financial globalization, debt securities markets are becoming increasingly important. What do they trade in such markets, and what kind of securities are considered debt securities?
What is a debt security
Debt securities reflect the monetary relationship between the issuer and the borrower. Many companies need to attract outside capital, but not everyone is ready to take a loan for these purposes. On the other hand, there are also potential investors willing to invest free cash in a successful venture. If a special license is needed to provide lending services, then no permissions are required to allocate funds on the basis of a certain document confirming the loan.
Debt securities just confirm the right of their holder to return the amount indicated in them, taking into account the receipt of a certain financial profit. In this case, the investor investing his funds acts as a creditor, and the issuer, issuing a security, recognizes himself as a borrower.
The advantage of this type of securities is that they can be considered a reliable means of investing capital. Even if the company burns out, its assets will go under the hammer, and the proceeds will be used primarily to pay off debts, including those confirmed by securities.
However, debt securities have a drawback - a rather low yield. The interest earned on them does not compare with the income from bank lending. It is beneficial for the issuer to issue such securities - after all, most often they are much cheaper than bank loans. Moreover, holders of debt securities cannot interfere in the company's policy, influence its management - this is very beneficial for the issuer, but not always good for the investor.
Analytical accounting of debt securities is carried out taking into account their type, maturity and other parameters.
Types and general characteristics
The list of debt securities is quite diverse - some are used more often, others less often. In this article we will consider the most used. So, the types of debt securities:
- Bill of exchange - is issued in accordance with a specific form. The essence of this document is a written certified obligation of the drawer (debtor) to pay the person who received the bill, a certain amount at the end of the document.
- Bond - a security expressing the issuer's debt obligation to redeem it after a certain period of time at the declared value, and during the validity period - giving the right to receive predetermined dividends.
- Treasury bond - in fact, the same bond, only its financial support is carried out at the expense of budget funds, and the issuer is the state.
- Savings certificate - it can be issued by various credit organizations, as well as a bond, gives the right to receive dividends during its validity period with the return of invested funds at the end of the contract.
Bill of exchange - brief description
As already mentioned, this is one of the most common debt securities. This is a fairly specific document with clear characteristics:
- Approved form - it must contain strictly defined points and details. The slightest deviations from the rules may become the basis for recognition of the bill null and void.
- Circulation - a bill can be transferred from hand to hand an unlimited number of times, this makes it an independent tool for settlements.Compensation for the bill will be received by the one who will be its last rightful owner.
- Strictness - debts on this type of securities are recovered much faster.
- Unconditional - this means that by the end of the term money must be returned to the holder without any additional conditions.
- Abstract - such a security is issued without reference to the event (operation), which served as the basis for its provision.
Types of bills
Let's take a closer look at these debt securities - their types and characteristics.
First of all, bills can be divided into two main groups: simple and transferable. The former are a direct obligation of the drawer to pay a certain amount by the specified date. The second is a bit more complicated. Bill of exchange characterized by a very important feature - the recipient of the goods (the person issuing the bill) declares a third party as the payer of his debt, it is he who is subsequently considered the debtor. In order to be sure that the bill will be paid, an acceptance is made - assurance. This means that a third party must confirm in writing its consent to pay the debt. When such a security passes from one person to another, a special endorsement is made on its back.
Based on the probability of repayment, several types of bills can be distinguished:
- commodity - confirms the obligation to pay for the received product at specific dates, can be used for settlements for various goods or services;
- financial - is a consequence of a loan agreement, that is, the "product" received under it is money; usually financial bills are readily used by firms to increase their working capital;
- friendly - written out if all participants in the transaction are real organizations / people, but in fact no transaction is conducted; such documents are executed when the investor provides friendly financial assistance to a needy enterprise and, in principle, does not expect to receive money back;
- bronze - a document that does not have real cash support is used to carry out fraudulent schemes, while one or more participants in the transaction are fictional characters.
What is a bond?
Now let's look at another debt securities - bonds. This is the issuer's payment obligation to reimburse the holder for the value of the security itself, as well as to pay the stipulated interest. Refunds are made within a strictly agreed period, called the maturity date. Depending on this, bonds can be:
- short-term - maturity less than 5 years;
- medium-term - from 5 to 15 years;
- Long-term - maturity of more than 15 years.
In a favorable economic situation, the long-term placement of funds in bonds is more justified.
Bonds Benefits
Such debt securities have a number of undeniable advantages:
- savings on loan servicing - as a rule, interest on loans received for the same period is much higher;
- attracting third-party funds for a longer time - in the current realities, obtaining loans for a long period of time for many enterprises is problematic;
- the opportunity to attract large investors;
- preservation of capital - unlike lenders, bondholders do not have ownership of part of the assets.
Types of bonds
How debt securities bonds can be divided by type of payment. Depending on this parameter, they are coupon and non-coupon (in this case, the coupon is understood as the% rate).
Coupon bonds, depending on the interest rate, can also be divided into several types:
- permanent coupon - all payments are strictly regulated, are made in a certain period of time and at a fixed interest rate;
- variable coupon - despite the fact that the terms of payment are strictly agreed, the interest rate can vary in one direction or another;
- indexable - the interest rate is adjusted relative to the level of inflation, payments are periodic.
A zero-coupon bond means that payment will be made only at the expiration of the Central Bank, and the interest rate is zero.
Typically, payments on bonds are clearly regulated and are made at the end of its validity period, but there may be other options. Depending on this, bonds can be:
- repayable - the holder has the right to “hand over” the bond before the expiration date;
- revocable - the right to redeem a security ahead of schedule belongs to the issuer.
Other debt securities
Classification of debt securities is not possible without mention certificates of deposit and treasury bills.
The first is a written certificate issued by a bank or other credit institution confirming the deposit of funds. Such a document fixes the right of the depositor to return the deposit with payment of interest due at the end of the contract.
The second ones confirm that their owners have contributed money to the state budget and are entitled to receive certain income in the form of annual payments of interest due.
Conclusion
In conclusion, I would like to note that debt securities are not only an effective way to receive additional investments, but also a good investment. The issue of such securities is usually engaged in large companies with a stable turnover and high credit rating, therefore, such investments are quite reliable.
