Financial Terms
Debt Security

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Definition of Debt Security

Debt Security Image 1

Debt Security

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

Related Terms:


Failure to make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture.

Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.

Reinvestment rate

The rate at which an investor assumes interest payments made on a debt security can be
reinvested over the life of that security.

Zero coupon bond

Such a debt security pays an investor no interest. It is sold at a discount to its face price
and matures in one year or longer.

Accrued Interest

The amount of interest accumulated on a debt security between
interest paying dates

Coupon / Coupons

The periodic interest payment(s) made by the issuer of a bond
(debt security). Calculated by multiplying the face value of the
security by the coupon rate.

Coupon Rate

The rate of interest paid on a debt security. Generally stated on an
annual basis, even if the payments are made at some other

Debt Security Image 2


The weighted average of the time until maturity of each of the
expected cash flows of a debt security


A debt security issued in a market other than the home market of
the company issuing the security

Yield to Maturity

The measure of the average rate of return that will be earned on a
debt security held until it matures

Held-to-Maturity Security

A debt security for which the investing entity has both the positive
intent and the ability to hold until maturity.

Redeemable Preferred Stock

A preferred stock issue that must be redeemed by the issuing enterprise or is redeemable at the option of the investor. Considered a debt security for accountingpurposes.


A debt security issued by a government or company. You receive regular interest payments at specified rates while you hold the bond and you receive the face value when it matures. Short-term bonds mature in less than five years; medium-term bonds mature in six to ten years; and long-term bonds mature in eleven years or greater.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Convertible security

A security that can be converted into common stock at the option of the security holder,
including convertible bonds and convertible preferred stock.

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 Security Image 3


Money borrowed.

Debt capacity

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

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 instrument

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

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 relief

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

Debt securities

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

Debt service

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

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-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 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

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.

Derivative security

A financial security, such as an option, or future, whose value is derived in part from the
value and characteristics of another security, the underlying security.

Exchangeable Security

security that grants the security holder the right to exchange the security for the
common stock of a firm other than the issuer of the security.

Firm's net value of debt

Total firm value minus total firm debt.

Funded debt

debt maturing after more than one year.

Host security

The security to which a warrant is attached.

Hybrid security

A convertible security whose optioned common stock is trading in a middle range, causing
the convertible security to trade with the characteristics of both a fixed-income security and a common stock

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/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.

Monthly income preferred security (MIP)

Preferred stock issued by a subsidiary located in a tax haven.
The subsidiary relends the money to the parent.

Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash
flow from the collateral pool is "passed through" to the security holder as monthly payments of principal,
interest, and prepayments. This is the predominant type of MBS traded in the secondary market.

Original issue discount debt (OID debt)

debt that is initially offered at a price below par.

Primitive security

An instrument such as a stock or bond for which payments depend only on the financial
status of the issuer.

Secured debt

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


Piece of paper that proves ownership of stocks, bonds and other investments.

Security characteristic line

A plot of the excess return on a security over the risk-free rate as a function of
the excess return on the market.

Security deposit (initial)

Synonymous with the term margin. A cash amount of funds that must be deposited
with the broker for each contract as a guarantee of fulfillment of the futures contract. It is not considered as
part payment or purchase. Related: margin

Security deposit (maintenance)

Related: Maintenance margin security market line (SML). A description of
the risk return relationship for individual securities, expressed in a form similar to the capital market line.

Security market line

Line representing the relationship between expected return and market risk.
security market plane A plane that shows the equilibrium between expected return and the beta coefficient
of more than one factor.
security selection
See: security selection decision.

Security selection decision

Choosing the particular securities to include in a portfolio.

Senior debt

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

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.

Total debt to equity ratio

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

Trade debt

Accounts payable.

Underlying security

Options: the security subject to being purchased or sold upon exercise of an option
contract. For example, IBM stock is the underlying security to IBM options. Depository receipts: The class,
series and number of the foreign shares represented by the depository receipt.

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.

Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.


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)


Borrowings from financiers.


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

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.

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.

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 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.

Security Market Line

A graph illustrating the equilibrium relationship between the
expected rate of return on securities and their risk as measured by
the beta coefficient

Total Debt to Total Assets Ratio

See debt ratio

Fixed-income security

A security that pays a specified cash flow over a
specific period. Bonds are typical fixed-income securities.

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.

Bad debt

An account receivable that cannot be collected.


Funds owed to another entity.

Long-term debt

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

Marketable security

An easily traded investment, such as treasury bills, which is
recorded as a current asset, since it is easily convertible into cash.


Either the collateral on a loan, or some type of equity ownership or debt, such
as a stock option or note payable.

floating-rate security

security paying dividends or interest that vary with short-term interest rates.

funded debt

debt with more than 1 year remaining to maturity.

MM's proposition I (debt irrelevance proposition)

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

secured debt

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

security market line

Relationship between expected return and beta.

subordinated debt

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

Debt Instrument

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

Monetizing the Debt

See printing money.

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.

Public Debt

See national debt.

Publicly Held National Debt

See national debt.

Employee Retirement Income Security Act of 1974 (ERISA)

A federal Act that sets minimum operational and funding standards for employee benefit

Social Security Act of 1935

A federal Act establishing Old Age and Survivor’s
Insurance, which was funded by compulsory savings by wage earners.

Available-for-Sale Security

A debt or equity security not classified as a held-to-maturity security or a trading security. Can be classified as a current or noncurrent investment depending on the intended holding period.

Equity Security

An ownership interest in an enterprise, including preferred and common stock.

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.


A share or an interest in a property or an enterprise such as a stock certificate or a bond.

Trading Security

A debt or equity security bought and held for sale in the near term to generate income on short-term price changes.







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