2. 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

3. 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“

4. 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!

5. Example I

6. Example II

7. Example III

8. Example IV

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

10. Payment Date 2)
PAYMENT DATE:
interest
US Treasury
Investor

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

12. 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

13. 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

14. 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

15. 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

16. Questions ?
Comments ?

17. Thank you for
your attention !