Debt InstrumentsExplained & Defined

Written By:
Lisa Borga

What Are Debt Instruments?

Debt instruments are tools that an entity can use to acquire capital.

These debt instruments are a documented, legally binding obligation under which a lender provides the debtor with funds.

In return, the debtor agrees to repay the lender according to the terms of the agreement.

This contract will outline the interest rate for the loan, the interest payment schedule, any collateral that may be required, debt covenants, if any, and the maturity date.

Debt Instruments Explained

Debt instruments are a broad category that includes all instruments which can be primarily classified as debt.

Debt instruments are used by businesses, governmental entities, and individuals alike to raise capital.

These tools provide the debtor with capital in return for the promise to repay the lender over a period of time.

Though debt instruments can be used by individuals, the term is generally used to refer to their use by organizations.

Common examples of debt instruments include loans, lines of credit, and bonds.

The issuance market for a debt instrument can vary considerably based upon the specific type of instrument.

Lines of credit or credit cards are often offered by a single lender under a relatively simple structure.

They are also generally not associated with securitization in a primary or secondary market.

However, other types of debt instruments may involve complex structures and potentially many, many investors taking part through formal marketplaces.

Types of Debt Securities

There are a number of common debt security instruments, such as U.S. Treasuries, municipal bonds, and corporate bonds.

These securities may have long-term or short-term maturities.

Short-term debt securities are those securities that will be paid back to the investors within a year.

In contrast, long-term debt securities have payment periods of over one year.

Generally, death securities we’ll be structured with repayments of anywhere from a month to 30 years.

Here are some of the most common debt instruments.

U.S. Treasuries

There are many different types of U.S. Treasuries investors can purchase.

They come in one-month, two-month, three-month, six-month, one-year, two-year, three-year, five-year, seven-year, 10-year, 20-year, and 30-year maturities.

All of these U.S. Treasuries are debt security instruments that the government uses to raise capital and can be purchased by institutional entities with an EIN and most members of the general public.

Municipal Bonds

Municipal bonds are another kind of debt instrument.

These bonds are issued by U.S. government agencies and are typically used to fund infrastructure projects.

Typically, municipal bonds are purchased by institutional investors.

Corporate Bonds

Corporate bonds are another common type of debt security.

These bonds can be used by companies to raise capital by selling them to the public. Corporate bonds are typically sold to institutional mutual funds.

However, anyone that has brokerage access may be able to invest in a corporate bond issuance.

Corporate bonds will have different maturity dates, and this will be one of the factors that will help determine the interest rate of the bond.

Final Thoughts

Debt instruments are used by companies to obtain capital.

There are a lot of different ways in which businesses can use debt instruments and in which they can be structured.

Almost any financial instrument that is classified as debt can be considered a debt instrument.

Key Takeaways

• Debt instruments are fixed-income assets that provide a debtor capital in return for a promise to repay the principal in addition to interest.
• Debt instruments can include any type of financial instrument that is primarily classified as debt.
• Debt instruments are one of the primary tools companies can use to raise capital.
• There is significant flexibility in the types of debt instruments a company can choose to use and how they are structured.