[Debt Series]

Session 1: Introduction to Debt Markets

We are glad to have you with us for our 1st Session on Debt – and that is Introduction to Debt Markets

Alright so let’s get started...

To reduce risk or to protect your capital, you need an asset class which performs the function of protecting your capital from eroding or turning negative. Debt is a traditional asset class which existed even much before ‘equity’ became popular and exciting as an asset class.

So let’s first understand...

What is Debt?
Why Invest in Equity?

simple terms, debt is an obligation or a commitment from the borrower to repay the money borrowed from the lender on or before the expiration of the pre specified date on which the final payment falls due while paying pre specified fixed return at regular intervals to the lender for the use of the money.

So how is debt investing different from equity investing?

Equity vs. Debt

Equity Debt
As an Equity Investor
Part ownership in the company
Voting Rights
Share in company’s future profits
As a Debt Investor
Lender to the issuing company
Higher claim to the assets of the company
Pre specified rate of interest rate

When you invest your money via equities, as an investor you become part owner in the company issuing the equity shares. With ownership you also enjoy voting right in the company while also get a share in company’s future profits.

In case of debt, as an investor you become a lender to the borrowing company or issuer of debt security. In the event of the company filing for bankruptcy, you would enjoy higher claim to the assets of the company as a creditor, than as compared to a shareholder. However, as a debt investor you would not get voting rights or shares in company’s future profits. Instead you would be entitled to receive a pre specified rate of interest at regular intervals, spread across the tenure of such loan.

Benefits of Investing in Debt

  • Unlike equities, debts are considered to be less risky investments.

  • Companies usually raise money through debt for their short term finance needs

  • That’s the reason debt market returns are less volatile than equity market returns, which makes it suitable for conservative investors looking for preserving or protecting their capital or parking their near term surplus.

  • Debt or bondholders enjoy superior claim to a company's assets in the case of liquidation of the company’s assets. In this scenario, equity investors or shareholders are less likely to receive any compensation.

So to end our today’s learning exercise we now invite you to test your learning by

taking up this simple quiz

Just Click on the link below