Investment in debt securities is a form of investing that allows major institutions to raise funds. These securities act like requests for loans, and the issuer agrees to repay the money they loan to the investor, usually with interest, at a specific date. The investor buys these securities, and then earns a profit on the interest that accrues. Typically, the value of a unit of commercial paper is one hundred thousand dollars, which makes this type of investment an ideal choice for larger investors.
In contrast to other forms of investment, debt securities are typically low-risk. Governments, for example, issue bonds to fund government programs, pay state debt, and fulfill other missions. Since these bonds are backed by the U.S. government, they don’t carry a high credit risk, but the investor must have confidence in the company’s ability to repay its obligations.
Debt securities are considered to be the safest type of investment because the issuing institution is legally required to make the payments. Nevertheless, there are risks involved, and the issuer may default on the agreement or declare bankruptcy. As a result, the interest rates offered for these instruments are proportional to the risks associated with them.
In addition to credit risk, debt securities are also subject to market risk. Inflation lowers the value of debt instruments. For example, if a bond issued by the Treasury has a five-year maturity, the interest payments will be lower than the actual value of the bond.