Question

A debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. Describe it and write its features.

Hint:

Remember: A debt instrument is a loan agreement with predetermined terms - fixed maturity, specified interest rate (coupon), and principal repayment. Features include credit rating, security status, transferability, and priority claim. Examples include bonds, debentures, and treasury bills.

Answer 1

Step 1: Understanding the Concept:
Debt instruments are assets that can be used by governments or companies to raise capital.
Step 2: Detailed Explanation:
Description: It is essentially a loan. The buyer of the instrument (investor) is the lender, and the issuer (company/govt) is the borrower.
Features:
1. Maturity: It has a fixed date when the borrowed amount (Principal) must be returned.
2. Interest (Coupon): The issuer pays a fixed or floating rate of interest at regular intervals (periodic).
3. Priority: Debt holders have priority over shareholders for payment if the company goes bankrupt.
4. Lower Risk: Usually considered safer than equity because of the legal obligation to pay interest.
Step 3: Final Answer:
A debt instrument is a contractual loan with defined maturity, interest rates, and priority in repayment.