Friday, December 28, 2007

What Is Debt?

By JR Rooney

What is debt?

Debt is something that is owed. An individual or business owing a debt is called a debtor. The entity to whom a debt is owed is called a creditor. Debt is used to borrow purchasing power with a promise to repay at some point in the future. Many businesses use debt as a part of their overall corporate finance strategy.

Some types of debt

There are numerous types of debt obligations. They include loans, bonds, mortgages and promissory notes. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back with an agreed premium interest rate over time, or all at once at a later date (balloon payment). The amount of money outstanding is usually called a debt. The debt will increase through time if it is not repaid faster than it grows. In some systems of economics this effect is termed usury, in others, the term "usury" refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted.

Large organizations can issue debt in the form of securities, known as bonds. Each bond entitles the holder to interest and principal repayments. Bonds are traded in the bond markets, and are widely used as relatively safe investments.

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