What are debt securities?
Debt securities are debts that can be bought or sold between parties prior to maturity. Get a little more information about debt securities, starting with our debt securities definition. Debt securities definition  The term debt securities has a number of meanings, but generally, it refers to financial instruments that contain a promise from the issuer to pay the holder a defined amount by a specific date, i.e., the point at which the debt security matures. Theyre negotiable instruments, which means that ownership can be transferred from one party to another easily. Bonds (government, corporate, or municipal) are one of the most common types of debt securities, but there are many different examples of debt securities, including preferred stock, collateralized debt obligations, euro commercial paper, and mortgage-backed securities. Understanding the features of debt securities  There are several standard features of debt securities that its a good idea to pay attention to. These include, but arent limited to, the following:  Coupon rate  This refers to the interest rate that issuers need to pay. Coupon rates can be fixed throughout the life of the security or vary depending on inflation and the economy. Issue date/price  This refers to the price and date at which the debt security was first issued. Maturity date  This refers to the date that the issuer needs to repay the principal and remaining interest. Its important to note that term length will have an effect on price and interest rates as investors look for higher returns with longer investments. Yield-to-maturity  This refers to the annual rate of return that investors expect to earn if the debt is held to maturity. Its used to compare debt securities with different maturity dates. As you can see, there are a couple of typical features of debt securities that you should familiarise yourself with if you want to invest in these types of financial instruments. Debt securities vs. equity securities  There are a couple of fundamental differences between equity securities and debt securities. Essentially, equity securities are a claim on the assets/earnings of a business, whereas debt securities are investments in debt instruments. In addition, equity securities dont provide guaranteed dividends, which means that theres no specific rate of return. Impairment of debt securities  Impairment is a reduction in the value of an asset due to a decline in its quantity, quality, or market value. Although its a relatively complex accounting concept, essentially, it means that youll need to account for any impairment losses on your companys profit and loss account. You can do this by comparing the recoverable value of the asset with its book value before writing that amount as a loss. So, the impairment of debt securities refers to situations where the fair value of the debt security is less than its amortized cost basis. There are many advantages for investors associated with debt securities. Firstly, theyre designed to provide investors with repayment of their initial capital investment, plus interest, upon maturation. Its also important to remember that they provide guaranteed, regular payments through interest, providing a steady stream of income. Finally, debt securities can be an effective way of diversifying your portfolio, helping you manage risk. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.