Debt Securities

Debt securities are basically Promissory Notes that pay interest and the return of principal at the end of a specified term.

Debt securities are issued by the U. S. government, U. S. government agencies, state and local governments, large corporations, and dollar-denominated securities of foreign governments and corporations.

Debt securities are issued with a specific coupon (interest) rate and maturity. Once issued, they are subject to credit risk and interest rate risk. Credit risk is the chance the issuer will fail to pay the interest payments on the security or to pay the principal at maturity. Negative perceptions of the issuer’s ability to make interest or principal payments will cause the price of the security to decline.

Types of Debt Securities

Debt securities are classified by maturity as follows:

• 90 days or less:
  • U. S. Treasury Bills and Commercial paper
• 91 days to 1 year:
  • U. S. Treasury Notes
• 1 year to 30 years:
  • U. S. Treasury Bonds
  • U. S. government agency (FNMA, ) The agencies issue bonds which are a direct obligation of the agency and they also sell pools of mortgages (mortgage backed securities) where the payments of interest and principal derive from the mortgages that comprise the security.
  • Corporate bonds
  • Mortgage Backed Securities (issued by large financial institutions).
  • Collateralized Loan Obligations (pools of auto loans, credit card debt, etc issued by large financial institutions).
  • Zero percent coupon are a special form of bond in that they are similar to a U. S. Saving Bonds were all the interest is paid at maturity rather than periodically over the life of the bond.

Ratings

There are two companies that grade investment securities, Standard and Poor’s and Moody’s Investors Service.

Tax Consequences of Equity Ownership

Interest received by an investor are taxed as ordinary income, subject to the current year’s tax rates in the year received, regardless if they were automatically reinvested.

Risk

Debt Securities are issued with a specific interest rate and maturity. Once the securities are issued they are subject to credit risk, and interest rate risk. Credit risk is the chance that the issuer will fail to pay the stipulated interest payments on the security, or to pay the principal at maturity. Negative perceptions of the issuer’s ability to make interest or principal payments will cause the price of the security to decline.

Getting Expert Financial Help

Most financial planners will advise that when investing in Debt securities it is best to diversify your portfolio. Depending on your financial goals and risk tolerance it may be best to consider investing in a professionally managed mutual fund portfolio of debt securities. You can chose from large universe of available options when investing through mutual funds

You should seek the expert advice of a professional financial planner who can help you decipher the complexity of investments, and define strategies according to your financial goals and risk tolerance.