Question

Identify and briefly discuss three different debt products appropriate for different situations. What is the difference between secured and unsecured debt? IN DEPTH ANSWER PLEASE.

Answer 1

DEBT is a sum of money that you borrow from someone to make large purchases that we cannot afford under self financing. Debts when classified on the basis of their security turm out to be of 2 variants- SECURED DEBT & UNSECURED DEBT.

SECURED DEBT- It is a debt backed by security or guarantee as a collateral to reduce the risks of non payment. common examples of collateral are vehicles, land or other valuable belongings such as jewellery. The lender will hold the title to the property until we repay back the loan.If we fail to repay back the lender takes possession of the collateral and apply the proceeds to recover its debt and return the surplus if any. The borrowing limit is higher than those for unsecured loans because of the security attached to it.

UNSECURED DEBT- It is a debt which doesnot require any collateral .if we fail they generally cannot take any of our assets for the debt. they resort to other practices such as they will hire a debt collector to coax us to pay the debt, or report to the credit bureaus, appeal to the court . credit card debt is the most widely held unsecured debt instrument. they often are coupled with high interest rates.

DIFFERENT DEBT INSTRUEMNTS FOR DIFFERENT SITUATIONS

COMMERCIAL PAPERS-These short term unsecured instruments have showed up in india since 1990 and have a maturity period of 270 days. These papers raises large amount of money which is governed by RBI . only good credit rating agencies can issue the commercial paper to another business firms, insurance comapnies, pension funds and banks.Its a promissory note whose cost of raising funds is lower than the commercial banks. Being freely transferable in nature it is highly secure and non restrictive. But the limitation to this is that only highly secured and rated oragnisation can raise funds through these paper.

Bonds- it is a fix income security where the investor loans to the entity for capital as well as revenue expenditure of the company. the company has to pay a fixed amount of interest either monthly, yearly, quartely as applicable to the investor and redeem the amount at maturity period. they are issued by the government at risk free rates.there are many types of bonds- convertible into equity shares, non convertible, zero coupn bons paying only maturity amount at the end of period.bonds are traded at face value, premium and discount. bonds are securities that give the holder a creditor stake in the comapny. these are mostly issued by public authorities, credit institutions, companies in the primary market.

Debentures- The primary difference between debentures and other forms of bonds is that the former have no such asset backing. debentures are most often used as a means of raising short term capital to fund specific projects. the bondholders' investment is repaid with interest earned from the projects. this type of debt instrument is backed only by the credit and general trustworthiness of the issuer. both bonds and debentures are popular among investors because of their guaranteed fixed rates of income.T-bill at risk free rate of interest is a common example of debenture issued by government authorities.