What Are Debt Securities?
A debt security is money lent between two parties. With it will be an agreed interest rate. One party agrees to repay the original borrowed amount, known as the principal, plus an agreed rate of interest on the maturity date. Debt securities can take the form of bonds, which are most common, CDs, and treasury bills, which can be issued by banks, government entities, and corporations. Fixed-income securities are the most common form. The lender receives the final amount. This includes the principal amount and interest.
Interest rates are largely contingent on the borrowers ability to repay the debt. Typically, higher risk will lead to a higher yielded interest. Safety regarding the principle amount is the greatest benefit. Government issued securities will have lower returns than those issued by corporations. This is due the reduced risk in defaulting.
Companies issue these bonds. They are classified as either investment grade or non-investment grade, based on the company’s credit rating. Investment grade come from companies with stable credit while non-investment grade, also known as junk bonds or high yield bonds, come from companies with a very low credit rating. Junk bonds do have the possibility of a higher return but come with a much higher risk of the company defaulting on repayment.
The government issues Treasury bonds. They have a mandatory maturity date of twenty years. The credit of the US Treasury backs them. They are very low risk but the long waiting period makes them unpopular with investors looking for returns they can use in the near future. However, the high amount of security they offer makes them a good choice for someone looking for a long-term investment.
Treasury Bills / Treasury Notes
The US treasury issues these debt instruments. They mature faster and have a lower yield than treasury bonds. Bills mature in less than a year. Treasury notes mature in ten years or less.
States, cities, and counties issue municipal bonds. Capital projects are funded by them. They are usually low risk with low yield but interest is tax exempt both federally and at the issuing municipal level.
Banks issue certificate of deposits. Money is deposited for a fixed length of time. This can range from a month to more than five years. Cds have lower interest rates rates than bonds but are higher than traditional savings accounts. CDs can be cashed out early. They will however incur a penalty for early withdrawal.
Be smart with your money. If a debt security is right for you, there a multiple ways to invest and get a return. Debt securities tend to be a one of the safest ways to invest your money and to know exactly what you’ll get in return.