Types of Debt

There are many different forms of debt, including loans, syndicated loans, bonds and promissory notes. Debt can be unsecured or secured. Secured loans are given when collateral is promised as part of the loan arrangement. This collateral may be a home in the case of a mortgage, or other security interests in personal property. The creditor receives rights over the property in the event of a borrower default on a loan.

Basic loans consist of an agreement to lend an amount of money, known as the principal sum, for a fixed period of time. The loan must be repaid by a preset date. The vast majority of loans include interest, often stated as a percentage of the principal charged annually, which must also be repaid.

Syndicated loans are given to companies who wish to borrow a large amount of money. A single lender may not be willing to risk such a large loan, usually in the millions of dollars. A syndicate of banks may agree to each provide a portion of the principal sum for the loan, spreading the risk out among several lenders.

Bonds are debt security issued by companies and governments. The bond entitles the holder to repayment of the principal sum and interest. Bonds are issued to investors when a company or government wishes to borrow money. Bonds feature fixed lengths of time, usually a number of years. Long term bonds are rare, but it is possible to find some that last over 30 years. Interest may be added to the final payment, or it can be paid in regular installments, known as coupons. Bonds are traded on bond markets, and are often used as a more conservative investment option over stocks.