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From Wikipedia, the free
encyclopedia Debt is that which
is owed; usually referencing assets owed, but the term can also cover moral
obligations and other interactions not requiring money. In the case of
assets, debt is a means of using future purchasing power in the present
before a summation has been earned. Some companies and corporations use debt
as a part of their overall corporate finance strategy.[citation
needed]
A debt is created when a creditor agrees to
lend a sum of assets to a debtor. In modern society, debt is usually granted
with expected repayment; in many cases, plus interest. Historically, debt
was responsible for the creation of indentured servants.
Etymology
The word comes from the Old French dette
and ultimately Latin debere (to owe), from de habere (to
have). The letter b in the word debt was reintroduced in the
17th century, possibly by Samuel Johnson in his Dictionary of 1755— several
other words that had existed without a b had them reinserted at
around that time.
Payment
Before a debt can be made, both the debtor
and the creditor must agree on the manner in which the debt will be repaid,
known as the standard of deferred payment. This payment is usually
denominated as a sum of money in units of currency, but can sometimes be
denominated in terms of goods. Payment can be made in increments over a
period of time, or all at once at the end of the loan agreement.
Types
of debt
A company uses various kinds of debt to
finance its operations. The various types of debt can generally be
categorized into: 1) secured and unsecured debt, 2) private and public debt,
3) syndicated and bilateral debt, and 4) other types of debt that display
one or more of the characteristics noted above.
A debt obligation is considered secured if
creditors have recourse to the assets of the company on a proprietary basis
or otherwise ahead of general claims against the company. Unsecured debt
comprises financial obligations, where creditors do not have recourse to the
assets of the borrower to satisfy their claims.
Private debt comprises bank-loan type
obligations, whether senior or mezzanine. Public debt is a general
definition covering all financial instruments that are freely tradeable on a
public exchange or over the counter, with few if any restrictions.
Loan syndication is a risk management tool
that allows the lead banks underwriting the debt to reduce their risk and
free up lending capacity.
A basic loan is the simplest form of debt.
It consists of an agreement to lend a principal sum for a fixed period of
time, to be repaid by a certain date. In commercial loans interest,
calculated as a percentage of the principal sum per year, will also have to
be paid by that date.
In some loans, the amount actually loaned
to the debtor is less than the principal sum to be repaid; the additional
principal has the same economic effect as a higher interest rate (see point
(mortgage)).
A syndicated loan is a loan that is granted
to companies that wish to borrow more money than any single lender is
prepared to risk in a single loan, usually many millions of dollars. In such
a case, a syndicate of banks can each agree to put forward a portion of the
principal sum.
A bond is a debt security issued by certain
institutions such as companies and governments. A bond entitles the holder
to repayment of the principal sum, plus interest. Bonds are issued to
investors in a marketplace when an institution wishes to borrow money. Bonds
have a fixed lifetime, usually a number of years; with long-term bonds,
lasting over 30 years, being less common. At the end of the bond's life the
money should be repaid in full. Interest may be added to the end payment, or
can be paid in regular installments (known as coupons) during the life of
the bond. Bonds may be traded in the bond markets, and are widely used as
relatively safe investments in comparison to equity.
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