Debt instrument – Definition and types

Definition:

Debt instrument is a document by which an issuing party raises funds and promises to repay the same as per the terms of the contract. A debt instrument is basically a medium of raising ‘borrower’s capital’ by a company.

It serves as an enforceable document for the lender of the fund in case of any dispute between lender and borrower.

These instruments are mainly used to generate some income by investors. The borrower (issuer) has to pay some kind of interest on these instruments which becomes the yield for investors.

Types of debt instruments:

Debt instruments normally include all types of loan fund raised by a company. Some of them are:

Debenture: A debenture is a document that either creates a debt or acknowledges it.

Bond: Bonds are instruments of indebtedness of the issuer to the holder. These are long term source of raising funds by a company. A fixed rate of interest called coupon is paid on these instruments.

Mortgage: A legal agreement between two parties wherein one party owns some debt from the other party in exchange of title of some property. The lender of money is known as mortgagee and borrower of money is known as mortgagor.

Lease: An agreement by which owner of a property (lessor) grants permission to other party (lessee) to use his/her property for a specific time period. The permission is grant only when the lessee agrees to pay some rent to the owner of that property.

Certificate of deposits: A certificate of deposit (CD) entitles its bearer to receive interest on the amount deposited by the bearer.

Author: Vikas Yadav

Vikas Yadav is the chief author at MonetarySection. He is an MBA (finance) from NCU Gurgaon. He started his career in 2014 and at the same time he started this website to educate people about finance.