INTRODUCTION
Debt Instruments is a financial tool which is offered as an investment by the company (debtor) to the investor (lender) with a written promise to pay the lender the interest amount and the principal at a specific period of time. It is used by the company to raise capital and includes various provision such as rate of interest for the capital invested, payment schedule of interest and the timeframe of maturity. Debt instrument tools facilitate the transfer of debt ownership to potential creditors enabling efficiently to create revenue and increased liquidity of the company. This tool is also known as the fixed-income securities and can be issued by government, corporations and financial institutions. In brief debt instruments can be define as the assets that individuals, governments and companies used to raise capital, generate their income and fulfills their short term and long-term financial requirement.
BONDS
Bonds are the most common types of debt instrument and are mainly used for the purpose of raising capital. Investors are attracted by bonds as they are generally backed by collateral or physical assets making it less risky as compared to the other instrument like stocks. Here the investors get a fixed coupon rate and a higher interest rate compared to fixed deposits and the issuer promises the repayment of the face value of the bond on maturity. Bonds can be corporate bonds, government bonds, convertible and non-convertible bonds, gold bonds, inflation – linked bonds, xero coupon rate bonds and several other categories. Bonds are further classified as short-term, medium-term and long-term bonds. Bonds appreciated when the market rate is low and follows the idea that the present value of bonds future cash flows is less when a higher discount rate is applied.
DEBENTURES
Debentures are the debt instruments that are not backed by collateral securities but by the creditworthiness and reputation of the issuing entity (issuer). Debenture’s holders will receive fixed interest throughout the debenture’s life and has a specific maturity date. Generally, debentures have a maturity period of 5 to 10 years. The relationship of the debenture holder with the issuing entity is that of the lender as they are the creditors of the company and do not have any ownership or voting rights. Debentures are classified as convertible and no-convertible debentures, registered and unregistered, redeemable and irredeemable debentures.
LOANS
Loans can be obtained from financial institutions or from individuals for the purpose of financing the business, purchasing equipment’s or for paying off their other debts. Certain amount of money is borrowed by the borrower(debtor) from the lender (creditor) assuring the lender the repayment of the capital and interest payment. Loans can be both secured types backed by collateral and unsecured not backed by collateral but interest rates may be higher in this type as compared to secured loans. Loans can also be classified as short-term, medium-term and long-term loans.
MORTGAGES
Mortgage is another type of loans that is backed by real estate as collateral securities. This instrument served the purpose of financing real estate purchase such as homes, land, commercial building or commercial property. The borrower makes payment until the full loan amount is paid off as the mortgage gets amortized over the time period. The lender receives interest in return of the mortgage with minimized risk of defaults since the real estate purchase itself serve the purpose as collateral securities.
COMMERCIAL PAPERS
Commercial papers are short term unsecured debt instrument issued by the company for meeting their short-term requirements like financing payroll, accounts payable, inventories and other short-term liabilities. Minimum issued period is 7 days and maximum period of 1 year from the issue date. Commercial papers can be in the form of promissory notes, drafts, certificate of deposits, banker’s acceptances and repurchase agreements.
TREASURY BILLS
Treasury Bill are short term debt instruments issued for the purpose of fulfilling short term expenditure needs and are mostly issued for a period of 91-day, 182 day and 364 days. It is issued by the Government of India.