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Debt securities

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Definition of Debt securities

Debt Securities Image 1

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.



Related Terms:

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk


diluted earnings per share (EPS)

This measure of earnings per share
recognizes additional stock shares that may be issued in the future for
stock options and as may be required by other contracts a business has
entered into, such as convertible features in its debt securities and preferred
stock. Both basic earnings per share and, if applicable, diluted
earnings per share are reported by publicly owned business corporations.
Often the two EPS figures are not far apart, but in some cases the
gap is significant. Privately owned businesses do not have to report earnings
per share. See also basic earnings per share.


income funds

Mutual funds that seek regular income. This type of fund invests primarily in government, corporate and other types of bonds, debt securities, and other income producing securities and in certain circumstances can also hold common and preferred shares.


Money Market

A market that specializes in trading short-term, low-risk, very liquid
debt securities


money market fund

A type of mutual fund that invests primarily in short-term debt securities maturing in one year or less. These include treasury bills, bankers’ acceptances, commercial paper, discount notes and guaranteed investment certficates.



Theoretical spot rate curve

A curve derived from theoretical considerations as applied to the yields of
actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity
greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.


Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.


Debt Securities Image 2

Asset-Backed Securities

Bond or note secured by assets of company.


Bad debt

An account receivable that cannot be collected.


Bad debts

The amount of accounts receivable that is not expected to be collected.


bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.


Book-entry securities

The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the
Fed in the names of member banks, which in turn keep records of the securities they own as well as those they
are holding for customers. In the case of other securities where a book-entry has developed, engraved
securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are
usually kept in a central clearinghouse or by another agent.


Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.


Debt

Money borrowed.


Debt

Borrowings from financiers.


Debt

Funds owed to another entity.


Debt Securities Image 3

Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.


Debt Capacity

An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.



Debt (Credit Insurance)

Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. debt may or may not be secured.


Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.


Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.


Debt/Equity Ratio

A comparison of debt to equity in a company's capital structure.


Debt Financing

Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.


Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.


Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.


Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.


Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.


Debt market

The market for trading debt instruments.



Debt ratio

Total debt divided by total assets.


Debt Ratio

The percentage of debt that is used in the total capitalization of a
company. It is calculated by dividing the total book value of the
debt by the book value of all assets.


Debt relief

Reducing the principal and/or interest payments on LDC loans.


Debt Security

A security representing a debt relationship with an enterprise, including a government
security, municipal security, corporate bond, convertible debt issue, and commercial
paper.


Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.


Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.


Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).


Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.


debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.


Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.


Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.


Debtors

Sales to customers who have bought goods or services on credit but who have not yet paid their debt.


Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.


Exempt securities

Instruments exempt from the registration requirements of the securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.


Federal agency securities

securities issued by corporations and agencies created by the U.S. government,
such as the Federal Home Loan Bank Board and Ginnie Mae.


Firm's net value of debt

Total firm value minus total firm debt.


Funded debt

debt maturing after more than one year.


funded debt

debt with more than 1 year remaining to maturity.


Government securities

Negotiable U.S. Treasury securities.


Interest rate on debt

The firm's cost of debt capital.


Junior debt (subordinate debt)

debt whose holders have a claim on the firm's assets only after senior
debtholder's claims have been satisfied. Subordinated debt.


Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.


Long-term debt

A debt for which payments will be required for a period of more than
one year into the future.


Long Term Debt

Liability due in a year or more.


Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.


Long-term debt ratio

The ratio of long-term debt to total capitalization.


Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.


Manufactured housing securities (MHSs)

Loans on manufactured homes - that is, factory-built or
prefabricated housing, including mobile homes.


Mezzanine Debt

Refers to non-conventional debt that has a greater element of risk than secured debt but has less risk than equity.


MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.


Monetizing the Debt

See printing money.


Mortgage-backed securities

securities backed by a pool of mortgage loans.


Mortgage-Backed Securities Clearing Corporation

A wholly owned subsidiary of the Midwest Stock
Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed
MBSs transacted for forward delivery.


National Debt

The debt owed by the government as a result of earlier borrowing to finance budget deficits. That part of the debt not held by the central bank is the publically held national debt.


Original issue discount debt (OID debt)

debt that is initially offered at a price below par.


Pass-through securities

A pool of fixed-income securities backed by a package of assets (i.e. mortgages)
where the holder receives the principal and interest payments. Related: mortgage pass-through security


Project loan securities

securities backed by a variety of FHA-insured loan types - primarily multi-family
apartment buildings, hospitals, and nursing homes.


Public Debt

See national debt.


Public Securities Administration (PSA)

The trade association for primary dealers in U.S. government
securities, including MBSs.


Publicly Held National Debt

See national debt.


RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)


Secured debt

debt that, in the event of default, has first claim on specified assets.


secured debt

debt that has first claim on specified collateral in the event of default.


Securities

A general term for stock, bonds, or other other financial assets.


Securities analysts

Related:financial analysts


Securities and Exchange Commission (SEC)

The federal agency that
oversees the issuance of and trading in securities of public businesses.
The SEC has broad powers and can suspend the trading in securities of a
business. The SEC also has primary jurisdiction in making accounting
and financial reporting rules, but over the years it has largely deferred to
the private sector for the development of generally accepted accounting
principles (GAAP).


Securities and Exchange Commission (SEC)

Federal agency responsible for regulation of securities markets in the United
States.


Securities and Exchange Commission (SEC)

A federal agency that administers securities legislation,
including the securities Acts of 1933 and 1934. Public companies in the United States
must register their securities with the SEC and file with the agency quarterly and annual financial
reports.


Securities & Exchange Commission

The SEC is a federal agency that regulates the U.S.financial markets.


Senior debt

debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.


Senior Debt

Are debt instruments that provide financing, take primary security against either specific or all assets of the borrower, have fixed terms of repayment and charge fixed or floating interest rates.


Stripped mortgage-backed securities (SMBSs)

securities that redistribute the cash flows from the
underlying generic MBS collateral into the principal and interest components of the MBS to enhance their use
in meeting special needs of investors.


Structured debt

debt that has been customized for the buyer, often by incorporating unusual options.


Subordinated debt

debt over which senior debt takes priority. In the event of bankruptcy, subordinated
debtholders receive payment only after senior debt claims are paid in full.


subordinated debt

debt that may be repaid in bankruptcy only after senior debt is paid.


Subordinated Debt

debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.


Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.


Total Debt to Total Assets Ratio

See debt ratio


Trade debt

Accounts payable.


Treasury securities

securities issued by the U.S. Department of the Treasury.


Unfunded debt

debt maturing within one year (short-term debt). See: funded debt.


Unsecured debt

debt that does not identify specific assets that can be taken over by the debtholder in case of default.


ACID-TEST RATIO

A ratio that shows how well a company could pay its current debts using only its most liquid or “quick” assets. It’s a more pessimistic—but also realistic—measure of safety than the current ratio, because it ignores sluggish, hard-toliquidate current assets like inventory and notes receivable. Here’s the formula:
(Cash + Accounts receivable + Marketable securities) / (Current liabilities)


CARDs

Certificates of Amortized Revolving debt. Pass-through securities backed by credit card receivables.


financing decision

a judgment made regarding the method
of raising funds that will be used to make acquisitions; it
is based on an entity’s ability to issue and service debt and
equity securities


mark to market

Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.


Merchant Bank

A financial institution that engages in investment banking functions, such as advising clients in mergers and acquisitions, underwriting securities and taking debt or equity positions.


Nonmarketable Security

A debt or equity security for which there is no posted price or bidand-
ask quotation available on a securities exchange or over-the-counter market.


Primary Market

Market where debt and equity securities are sold by an issuing
company to investors to raise capital for its operations


Substitute sale

A method for hedging price risk that utilizes debt-market instruments, such as interest rate
futures, or that involves selling borrowed securities as the primary assets.



 

 

 

 

 

 

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