Debt Securities


A debt security is also known as a fixed income security and includes any debt instrument that can be bought or sold between two parties and which has basic terms defined, such as notional amount (borrowed amount), interest rate and maturity/renewal date. These securities provide interest payments as compensation for the use of an investor's (ie, lender's) funds. The payments usually last until the maturity date, or upon the sale of the security, at which point the notional amount is repaid.

Debt securities include government bonds, corporate bonds, money-market instruments, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities. The interest rate on a debt security is largely determined by the perceived repayment ability of the borrower; higher risks of payment default almost always lead to higher interest rates. Furthermore, debt securities on the whole are safer investments than equity securities, but riskier than cash. They are typically classified and grouped by their level of default risk, the type of issuer and income payment cycles.