Definition of Debt instrument

Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.

Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.

Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

Current maturity

Current time to maturity on an outstanding debt instrument.
Current / noncurrent method
Under this currency translation method, all of a foreign subsidiary's current
assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets
and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was
acquired or the liability incurred.

Debt market

The market for trading debt instruments.

Euro-note

Short- to medium-term debt instrument sold in the Eurocurrency market.

Medium-term note

A corporate debt instrument that is continuously offered to investors over a period of
time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year,
more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Note

debt instruments with initial maturities greater than one year and less than 10 years.

Bond

A long-term debt instrument in which the issuer (borrower) is
obligated to pay the investor (lender) a specified amount of
money, usually at specific intervals, and to repay the principal
amount of the loan at maturity. The periodic payments are based
on the rate of interest agreed upon at the time the instrument is
sold.

Cost of capital

The blended cost of a company’s currently outstanding debt instruments
and equity, weighted by the comparative proportions of each one. During a capital
budgeting review, the expected return from a capital purchase must exceed this cost
of capital, or else a company will experience a net loss on the transaction.

Instrument

See debt instrument.

Money Market

A financial market in which short-term (maturity of less than a year) debt instruments such as bonds are traded.

Convertible Debenture

Are debt instruments that are convertible into common or preferred shares, take secondary or no security against assets, have flexible terms of repayment and charge fixed or floating interest rates.

Face Value

The nominal value which appears on the face of a document recording an entitlement, generally an amount of money that has to be repaid on the maturity of a debt instrument.

Mortgage

debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan.

Principal

The obligation due under a debt instrument exclusive of interest.

Senior Debt

Are debt instruments that provide financing, take primary security against either specific or all assets of the borrower, have fixed terms of repayment and charge fixed or floating interest rates.

Subordinated Debt

debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.

Alternative mortgage instruments

Variations of mortgage instruments such as adjustable-rate and variablerate
mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used
variations.

Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt

Money borrowed.

Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.

Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.

Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.

Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.

Debt ratio

Total debt divided by total assets.

Debt relief

Reducing the principal and/or interest payments on LDC loans.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.

Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.

Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.

Deliverable instrument

The asset in a forward contract that will be delivered in the future at an agree-upon price.

Derivative instruments

Contracts such as options and futures whose price is derived from the price of the
underlying financial asset.

Firm's net value of debt

Total firm value minus total firm debt.

Fixed-income instruments

Assets that pay a fixed-dollar amount, such as bonds and preferred stock.

Funded debt

debt maturing after more than one year.

Instruments

Financial securities, such as money market instruments or capital market insturments.

Interest rate on debt

The firm's cost of debt capital.

Junior debt (subordinate debt)

debt whose holders have a claim on the firm's assets only after senior
debtholder's claims have been satisfied. Subordinated debt.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial
investment.

Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.

Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.

Long-term debt ratio

The ratio of long-term debt to total capitalization.

Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial investment.

Original issue discount debt (OID debt)

debt that is initially offered at a price below par.

Secured debt

debt that, in the event of default, has first claim on specified assets.

Senior debt

debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.

Structured debt

debt that has been customized for the buyer, often by incorporating unusual options.

Subordinated debt

debt over which senior debt takes priority. In the event of bankruptcy, subordinated
debtholders receive payment only after senior debt claims are paid in full.

Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.

Trade debt

Accounts payable.

Unfunded debt

debt maturing within one year (short-term debt). See: funded debt.

Unsecured debt

debt that does not identify specific assets that can be taken over by the debtholder in case of default.

RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)

Debt

Borrowings from financiers.

Debtors

Sales to customers who have bought goods or services on credit but who have not yet paid their debt.

Bad debts

The amount of accounts receivable that is not expected to be collected.

bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.

debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.

Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.

Debt Ratio

The percentage of debt that is used in the total capitalization of a
company. It is calculated by dividing the total book value of the
debt by the book value of all assets.

Total Debt to Total Assets Ratio

See debt ratio

Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.

Bad debt

An account receivable that cannot be collected.

Debt

Funds owed to another entity.

Long-term debt

A debt for which payments will be required for a period of more than
one year into the future.

funded debt

debt with more than 1 year remaining to maturity.

MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.

secured debt

debt that has first claim on specified collateral in the event of default.

subordinated debt

debt that may be repaid in bankruptcy only after senior debt is paid.

Monetizing the Debt

See printing money.

National Debt

The debt owed by the government as a result of earlier borrowing to finance budget deficits. That part of the debt not held by the central bank is the publically held national debt.

Public Debt

See national debt.

Publicly Held National Debt

See national debt.

Debt Security

A security representing a debt relationship with an enterprise, including a government
security, municipal security, corporate bond, convertible debt issue, and commercial
paper.

Debt Capacity

An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.

Debt Financing

Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.

Debt/Equity Ratio

A comparison of debt to equity in a company's capital structure.

Financing Instruments

This is a generic term that refers to the many different forms of financing a business may use. For example - loans, shares, and bonds are all considered financing instruments.

Long Term Debt

Liability due in a year or more.

Mezzanine Debt

Refers to non-conventional debt that has a greater element of risk than secured debt but has less risk than equity.

Debt (Credit Insurance)

Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. debt may or may not be secured.

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk

Substitute sale

A method for hedging price risk that utilizes debt-market instruments, such as interest rate
futures, or that involves selling borrowed securities as the primary assets.

capital structure, or capitalization

Terms that refer to the combination of
capital sources that a business has tapped for investing in its assets—in
particular, the mix of its interest-bearing debt and its owners’ equity. In a
more sweeping sense, the terms also include appendages and other features
of the basic debt and equity instruments of a business. Such things
as stock options, stock warrants, and convertible features of preferred
stock and notes payable are included in the more inclusive sense of the
terms, as well as any debt-based and equity-based financial derivatives
issued by the business.

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