A debt security is basically a type of investment that represents a loan made by an investor to a borrower, typically corporate or governmental. This agreement includes a certain interest rate. When you buy a debt security, you essentially loan money to the entity for a fixed period. In return, the entity agrees to pay you a specific rate of interest during the life of the loan and to repay the principal amount loaned at maturity.
1. What are examples of debt securities?
Corporate bonds, Government bonds, Municipal bonds, Treasury bills, and Convertible bonds are all examples of debt securities.
2. What’s the difference between a debt and equity security?
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Debt securities represent borrowed money that needs to be repaid, with interest being a cost of borrowing. Equity securities represent ownership interest in a company. Companies that issue equity securities do not have to repay the money that’s been invested.
3. How do debt securities work?
Debt securities work as a form of borrowing where the issuing party agrees to repay the loan at a later date and pays the lender periodic interest. Investor who buys a debt security is basically lending money to a government or corporation.
4. What are the risks of investing in debt securities?
Like any investment, debt securities come with risk. These risks include credit risk (danger that the issuer won’t repay its debt), interest rate risk (risk that changes in interest rates will affect the price of the debt security), and inflation risk (that inflation will reduce the purchasing power of the returns on these securities).
5. Why would I want to invest in debt securities?
Investing in debt securities can be a good way to earn reliable, steady income. They offer regular interest payments and the return of the principal at maturity. They can also offer a way to diversify your portfolio.