Debt is called a debt instrument. The interest

Debt instruments:

The type of financial instrument in
which are undertaken to pay the investor (buyer) a regular amount as interest
plus repay the initial amount borrowed is called a debt instrument. The
interest amount which is required to be paid by the issuer is fixed
contractually.Therefore, this type of instrument is usually called fixed income
instrument.

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Features of
a Debt instrument:

·      
Debt istruments usually
carry a fixed rate of interest commited by the issuer.This rate is called as
‘coupon’.

·      
Company has to pay interest
whether they make profits or not.

·      
Debt securities are
tradable.The person can hold it until maturity or sell it prior to maturity and
make a capital gain (or loss)

·      
Holders of debt instruments
are not owners of the company .They are its creditors.The creditors may demand
collateral to secure their investment.In this case the instrument is called as
a secured debt,else it is unsecured debt.

·      
The face value of a debt
instrument defines the amount to be repaid on maturity.

Classification
of debt securities based on maturity:

Long term
debt-instruments-Bonds and Debentures:

These are
used to raise money for longer duration (more than one year)

Bonds:

The issuer
of the bond promises to pay the bondholder typically a fixed amount of interest
each year for a fixed time period.At the end of that time period (the maturity
date) the issuer promises to pay the bondholder the face value of the bond.

It is a
long term debt security

Coupon rate of a bond:

The
original interest rate committed by the issuer at the time security is first
issued is called coupon rate.Coupon payment can be quarterly or semi annual or
annual.

Zero coupon bond or discount bond: It is issued at a  discount
rate to face value and is redeemed at face value.

Issuer of bonds:The issuer
is a corporation or government(state or central)

GOI securities:

Bonds
issued by the Central government in India are called as GOI securities or
G-secs (also known as Gilts)

The coupon
on G-sec is paid every 6months( semi-annual coupon)

Debentures:

It is an
unsecured debt instrument which is backed by only the creditworthiness and
reputation of the company and not by physical assets and collateral.

The coupon
rate is higher than that of bonds as debentures are more riskier.

Companies
can issue bonds and debentures which are

 convertible(fully/partly)

non-convertible

Short term debt instruments-Money market instruments:

These are
used to raise money for short duration (less than one year).The money market
instruments are:

1.     Treasury bills:These are debt securities backed by government so
considered virtually default risk- free.

2.     Certificate of deposits:These are issued by bank or a financial
institutuion to raise money,similar to fixed deposits

3.     Commercial papers:These are unsecured debt instruments of large
denomination issued by a corporation to raise money.

As with
other debt securities, the holders of these instruments are exposed to most of
the general risks and particularly interest rate risk, liquidity and credit
spread risk.

Secondary
securities:

Time
deposits

Time
deposits are money deposits that cannot be withdrawn for a certain term of
period of time unless a penalty is paid. When the term is over it can be
withdrawn or it can be held for another term. Generally, speaking, the longer
the term the better the yield on the money

Mutual
funds

Mutual fund
is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in
offer document.

The
performance of a mutual fund scheme is reflected in its net asset value (NAV)
which is disclosed on daily basis in case of open-ended schemes and on weekly
basis in case of close-ended schemes. Net Asset Value is the market value of
the securities held by the scheme.It varies om day-to-day basis.

Insurance
policies

it means an
agreement in which one party agrees to pay a given sum of money upon the
happening of a particular event contingent upon duration of human life in exchange
of the payment of a consideration. The person who guarantees the payment is
called Insurer, the amount given is called Policy Amount, the person on whose
life the payment is guaranteed is called Insured or Assured. The consideration
is called the Premium. The document evidencing the contract is called Policy.

Derivative
instruments

Types of derivatives:

 1) forward and futures contracts

2) options

3) swaps