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What Are Debt Securities?

In the United States, federal currency represents a debt security held by the Federal Reserve.
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  • Written By: Jason C. Chavis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 August 2014
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Debt securities are a type of financial platform in which an issuer, also known as a creditor, provides assets to a borrower with the intention of receiving a repayment of the funds. Basically, it is some form of contract that represents money owed to another party. Examples of this include different types of bonds, documents such as debentures, or even paper money issued by a bank or government. These securities are usually backed by some sort of legal standing; however, some countries do not regulate the practice and allow creditors to issue statements privately.

The concept of a debt security is important to the continued function of most of the worldwide economy. Those institutions with capital provide individuals and companies in need of funding with the ability to purchase goods and services on credit. The creditor then issues some sort of binding document designed to symbolize the debt accrued. These documents are considered to be worth a certain value, requiring the individual or group to repay the debt according to the terms of the agreement.

Debt securities can be traded much like goods, allowing them to represent potential economic value. In this way, a bank or private entity can issue some sort of credit, create a debt security document, and then sell it to another source for the right to collect the repayment value. These securities therefore essentially equate to the exchange of money.

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Within the debt securities market, a number of different types of credit-based documents can be issued. Private debt securities are issued to a private entity by some sort of organization with the purpose of eventually being paid off with the addition of interest, such as a credit card account. Corporate debt securities are those which are issued to a company and represent a certain portion of that company's assets. Governments of all levels, from municipal to federal, issue such securities in the form of bonds. These are essentially promissory notes, which guarantee a repayment with interest to individuals after a certain period of time.

One of the most prevalent examples of a debt security is simply the currency issued by a federal government. In the United States, each piece of money represents a certain amount of debt held by the Federal Reserve. The centralized bank issues finances to the people of the United States through its government, specifically the Treasury department. These finances are represented by the paper and digital money that is transferred in exchange for goods and services by the private sector. Essentially, each dollar bill is equal to one dollar of debt held by the Federal Reserve, with the intention of accepting repayment by the people at some point in the future.

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