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. TYPED ANSWER 500-800 words

Answer 1

Debt is a loan that borrower takes from the lender at an agreed interest rate which can be fixed or floating for a specified time period. Debt can be secured and unsecured.

Secured debt are those debt which are backed by the underlying asset of the borrower known as a collateral security in case of default payment. Example, A keeps his house against a personal loan as a collateral security.

Unsecured debt are those debt which is not backed by the underlying asset of the borrower. Example, credit card debt and utility bills. Unsecured debts are high in risk.

Three types of debts are:

1. Bond: Bond is a contract between the lender and borrower where bond issuer agrees to repay a debt at fixed interest rate known as a coupon rate after a specified time period.The most common types of bonds are municipal bonds and corporate bonds. Bonds are usually transferable in the secondary market. Example, ABC company issues corporate bonds with a face value of $1000 with a fixed 5% coupan rate for 2 years. Bonds are of various types depending usually on the coupon rate I.e. fixed rate bonds, floating rate bonds, inflation index bonds and high yield bonds.

2.Debentures: Debentures are issued usually by a company to raise long term debt at a fixed interest rate. Debentures are transferable in the secondary market. In case of liquidization of a company, debenture holders hold the rights after creditors in repayment of debt.

3. Mortgages: In this lender lends certain amount to the borrower on an interest rate which are compounding in nature. Mortgage loans are secured as it is backed by a collateral security. In mortgage we repay the debt in installments which comprises of interest and principle amount.