Debt securities

Debt securities present the largest part of the financial instruments in financial markets. These are securities which certify debt relationship between the borrower (issuer) and creditor, and must be repaid in full with payment of income (per cent). In relation to securities the concept of debt security is defined as a monetary instrument, which indicates the presence between the issuer and the owner of the securities accounts-receivable relations. The category of debt securities include : government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities.
Debt securities, such as bonds, are good variant for companies that want to get extra capital, because first, unlike bank loans, bond issues provide the possibility to get credit resources for longer periods; and second, the company does not increase its share capital, as investors who have acquired the bonds, are not shareholders and therefore do not participate in the company’s management.
In this paper it is necessary to consider the main characteristics of debt securities, such as price and return, terms of sales, repayment terms, maturity terms and others. Then on the example of corporate bonds we will consider the properties and transactions with debt instruments in more detail.

Characteristics of debt securities
In a broad sense, monetary instruments which are traded on the securities market, refer to either the category of documents confirming the participation (membership), or documents proving the establishment of accounting-receivable relations. The category of debt instruments include those that indicate the presence of accounts- receivable relations. From this perspective debt security can be defined as a monetary instrument, which indicates the presence accounts-receivable relations between the issuer and the owner of the securities. These relations maybe considered as credit relations, when borrower who buys debt securities is a creditor to the issuer. When you purchase the debt securities of the issuer, you acquire the status of a creditor of the issuer, not the owner of the assets of the issuer. It is important to stress that in accounts receivable relations, the right to participate in management and decisions of the issuer is not available. (Wilson, 1995)
The category of debt securities includes government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities. Debt securities may be issued by the State, local governments, international organizations, lending institutions, commercial companies.
Debt securities certify debentures of the issuer with respect to the holder. In fact, this is a loan on which interest is paid. Debt securities may be secured by a collateral (such as real estate), or not secured by any collateral; they may be guaranteed by a guarantor, which is a third party that agrees to repay the principal and/or interest to holders of the debt security if the issuer defaults. (U.S. Securities and Exchange Commission)
An important characteristic of debt securities is the principal amount, or nominal value, which is the basis for calculating interest payments and is usually paid on the maturity date. In some cases it may be determined by the special conditions of payment of principal.
Maturity date is the date when the issuer pays the holder of securities the principal. If all payments are made, the issuer’s obligation with respect to securities holders ends on this day. Based on the maturity debt securities can be divided into:
– Short term – up to 1 year;
– Medium term – from 1 to 10 years;
– Long term – over 10 years.
A debt security may be callable that means that the issuer may redeem the debt security before the maturity date.
The next important characteristic is a coupon rate, which is the annual rate of interest that the issuer pays on the principal to the holder of the debt security. (Brown G.)
Coupon rate may be fixed or floating, and floating rate depends on short-term interest rates(LIBOR, EURIBOR) and fixed for a certain period (for example, 3 or 6 months). Zero-coupon has no periodic interest payments, for example, for the short-term debt securities the coupon is usually not paid, as they are issued and traded at a discount – the difference between the nominal value and price of the securities. (Ganquin, 2004)
Payment Date is the date when interest payments are made, for example, twice a year. When purchasing a security, at the time of the transaction the customer fixes the rate of return, which depends on purchase price, coupon rate and the accrued coupon income, which paid the previous holder of the bond (bond holder each day accumulates a fixed interest income). If to speak about the liquidity of the bond, it depends on many factors, such as the total emissions, market segment, the issuing bank, the market situation, etc. The risk level of bonds is defined as the interest rate risk and credit risk, State and / or businesses risk, as well as liquidity risk. In turn, credit risk characterizes the credit rating of the borrower. (Ganquin, 2004)