What is a Debt instrument? Example: Bond Interest Rate Agenda What is a Debt instrument? Example: Bond Issue, Payment & Majurity Date Interest Rate Further General Information Other Debt Instruments

What is a Debt Instrument? Intangible financial asset in form of loans, bonds, certificates, leases or other agreements between a lender and a borrower Represents legal claims to some future benefit Typical future benefit comes in the form of a future claim to future cash The claims of the holder are based on a fixed dollar amount Also called „fixed income instrument“

Example: Bond A bond issued by the US Department of the Treasury... the US government (the issuer) agrees to pay the investor interest until the bond matures, then at the maturity date repay the amount borrowed Incentive for the investor: interest!

Example I

Example II

Example III

Example IV

Issue Date 1) ISSUE DATE: Bond US Treasury Investor Principal

Payment Date 2) PAYMENT DATE: interest US Treasury Investor

Maturity Date 3) MATURITY DATE: Bond US Treasury Investor Principal

The interest rate reflects the risk The interest paid to the investor should at least be a little higher as the intrest rate of an US Treasury Bill because... ...otherwise there is no incentive for an investor to invest in a riskier paper ! The credit risk, which means the risk that the issuer will default on the obligation is higher

Further general Information The market, in which debt instuments are traded is referred to as the debt market Short-term bill (0-1 years) Long-term bond (majurity period of more that 15 years) higher interest, greater inflation & credit risk Intermediate-term (period between short and long term) Example: frensh corporation issuer (euro) and an american investor

Further General Information Although debt instruments are risk averse, there still are some risks  Credit risk (Will the issuer default?)  Inflation risk (Will my potential purchasing power of the cash flow expected decrease?)  Foreign exchange risk The real payout in a particular state depends on national price rates and exhange rates ! uncertainty about cash payments if a payout depends on an exchange rate

Other debt instruments Loan: e.g. an automobile or a home mortgage loan In contrast to a bond, the issuer of a loan is an individual who borrowed the funds. The investor is the entity, such as a bank. a loan agreement includes how the borrower will repay the loan and how the interest will be paid A bank deposit

Questions ? Comments ?

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