Debt instruments ?! Well if not the same, you all must have heard about BONDS and DEBENTURES !
And that's what will be dealt with here.
Alright..let's suppose a poor yeoman wishes to construct his house in village. His modus operandi would be to first check his pocket and borrow the rest. Upon scrutinization, he realises that he has fallen short of Rs.10K.
So he goes to a nearby moneylender to borrow this sum at a specific interest.
Now in economics terms; the money lent by the lender is an investment for him, because the borrower will return the principal with an additional interest. When this transaction is written on a contract, it becomes a debt instrument, where the lender becomes an "investor" and the borrower becomes the "issuer".
On a gargantuan scale, the term BOND is used for instruments that are issued by state or central governments ( like the ones issued by the GREEK Govt., which has led to the Greece Economic Crisis) or PSUs, while the term DEBENTURE is used for instruments issued by private players.
And that's what will be dealt with here.
Alright..let's suppose a poor yeoman wishes to construct his house in village. His modus operandi would be to first check his pocket and borrow the rest. Upon scrutinization, he realises that he has fallen short of Rs.10K.
So he goes to a nearby moneylender to borrow this sum at a specific interest.
Now in economics terms; the money lent by the lender is an investment for him, because the borrower will return the principal with an additional interest. When this transaction is written on a contract, it becomes a debt instrument, where the lender becomes an "investor" and the borrower becomes the "issuer".
On a gargantuan scale, the term BOND is used for instruments that are issued by state or central governments ( like the ones issued by the GREEK Govt., which has led to the Greece Economic Crisis) or PSUs, while the term DEBENTURE is used for instruments issued by private players.
The written contract will specify 3 key details :
1. Rate of interest : rate @ which money is borrowed
2. Maturity : date on which the principal will be repaid
3. Principal : the money lent
Depending on a person's risk tolerance, a person can decide on what bond or debenture to invest in. The main risk lies in the fact that the company or institution that is the Issuer, becomes bankrupt or shuts down abruptly. Here comes the role of CREDIT RATING COMPANIES like CRISIL ( in India) and STANDARD & POOR'S ( on the global scale). 'AAA' rating means the highest safety and 'D' means that the company is in default ( citing: GREEK ECONOMIC CRISIS).
A general principle in investment: "Higher the risk, higher the interest that the company will pay, on the other hand a safer company will provide a lower rate, but will ensure that your money rests in safe hands." Thus the safest kinds of debt instruments are the ones issued by the state or central govts., because the govt. itself guarantees the returns.
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