What Is a Debt Investment?

Malcolm Tatum

A debt investment is any type of financial opportunity that involves the acquisition of bond issues or debentures as a means of investing in a company. This type of investing activity is an alternative to choosing to purchase any shares of stock issued by that company, and will usually generate returns in a slightly different manner. Like all investment options, a debt investment does carry some degree of risk, although this approach is considered less volatile than many other strategies.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

One of the characteristics of a debt investment is that the investor is essentially making a loan to the company, with the expectation that the loan will eventually be repaid with interest. For example, purchasing a bond issued by a company typically means that when the bond is fully mature, the investor not only receives the total original investment but also a little more. This is different from purchasing shares of common or preferred stocks, since there is always the chance that the value of those shares could sink below the original purchase price, resulting in little to no dividends to offset the loss.

This aspect of a debt investment tends to make this particular approach to generating returns less risky for investors. It is not unusual for the issuers of bonds and debentures to secure some sort of insurance that at least covers the original purchase price paid by the investor, and possibly even some of the interest that is due, should the issuer suddenly be unable to honor the obligation. Since the rates applied to a debt investment are usually equitable considering the degree of risk the investor assumes, this approach can be well worth consideration for any investor in need of relatively safe investments to balance with riskier ventures in his or her portfolio.

While a debt investment is safer than many other types of investments, it is important to keep in mind that some risk does exist. Even if the issuer has secured some sort of insurance protection to help reimburse investors in the event of an unanticipated emergency, that coverage may or may not settle the entire amount due. In addition, if the bond is structured with the ability to call the issue early, the investor could end up making much less on the venture, missing out on more lucrative and equally safe investments in the interim. For this reason, investors should make no assumptions about a debt investment when projecting returns, but take the time to determine how much profit would result from either a failure of the issuer’s business, or an early call on the bond issue itself.

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