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Debt Security

Definition - What does Debt Security mean?

Debt securities, which can include government bonds, municipal bonds, treasury bills, commercial paper and preferred stocks, are debt instruments that are issued, bought, and sold between certain parties.

Debt securities allow for a specific amount to be borrowed, an established maturity date, and an assigned interest rate to be paid with interest rates generally determined by the expectation of repayment by the borrower. Higher interest rates are generally charged if there is an increased risk of default by the borrower.

Justipedia explains Debt Security

Debt securities are sold by local governments, the federal government, and corporations. They are bought by investors who wish to leverage other investments, increase their investment options, lower their risk of investments, have a guaranteed return on principal at the point of maturity, or when they are sold to enhance their investment liquidity.

Although debt securities may offer all of the advantages mentioned above, they are not without risk. Risks associated with debt securities can include risk of default, risk of variable interest rates, and downgrade risk.

For example a debt security, such as a fixed rate bond, may decrease in market value if interest rates rise. Debt securities can also lose value if a corporation or government defaults on its payments to investors or is unable pay the investors the principal investment at the time that the investment vehicle matures. Companies that have issued debt securities may also go bankrupt, leaving certain debt security holders with no guarantee of repayment.

Some debt securities also carry the risk of downgrade. For example, on August 5, 2011, United States debt was downgraded for the first time in years by several credit rating agencies. Credit agencies argued that the downgrade more clearly reflected their belief that American financial policy-making was not as effective or as predictable as it had been previously.

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