What it is
Debt instruments are financial tools that allow a person or entity to borrow money from another party. The parties enter a legal agreement that outlines the terms of payment, usually with interest.
Loans and bonds are common types of debt instruments. Individuals typically take out loans to finance large purchases.
Meanwhile, governments and corporations issue bonds to raise capital for things like operations, new projects, and expansion efforts.
What it means for you
Debt instruments can become part of your financial life as a borrower or lender.
Taking out a loan makes you a borrower. Before borrowing money, you should understand how it works and make sure you can handle the debt.
You can also lend out money by purchasing debt instruments like bonds or time deposits. By buying a bond or opening a time deposit, you’re essentially lending money to the bond issuer or the bank in exchange for interest payments.
An indirect way to invest in debt instruments is by putting money in pooled funds that contain them.
Debt instruments have the potential to provide a steady stream of income to investors.
That’s why they’re also called fixed income assets, and can appeal to those who want to get regular payments from their investments.
When investing in debt instruments, you’ll need to understand and accept the risks associated with these products, like credit risk and interest rate risk.
