Technically, debt is the amount of money loaned or borrowed by one party from a lender such as a bank. This is usually used by many individuals and even corporations to make huge purchases that they cannot afford regularly. An arrangement or contract is made that allows the borrower to receive money under certain conditions that the total amount is paid back with interest at a prescribed date.
Debts typically come as mortgages, auto loans, and credit card debt. Under the terms and conditions of a loan, you are required to completely repay the loan balance at a particular date, which may span from months to several years. Likewise, some contracts may also stipulate the amount of interest you are required to pay annually. This is expressed as loan amount percentage. Meanwhile, interests provide lenders the assurance of having a certain form of compensation while also encouraging the borrower to repay quickly to limit total interest expense.
Although a loan and a credit card debt operate similarly, the latter may change the amount of money borrowed over time depending on the borrower’s necessities until he or she reaches the predetermined limit. Moreover, credit card debts have an open-ended or rolling repayment date.
What about Corporate Debts?
Aside from credit card debt and loans, companies also have other options to borrow money. Some of the common types of corporate debt include commercial paper and bonds. These, nevertheless, are not available for individuals.
Bonds – This is a form of debt instrument that permits a company to generate funding through selling investors a promise of repayment. Both institutional investment firms and individuals can acquire bonds, which typically offer a set of interests or coupon rate. For instance, if a company needs $2 million dollars for business expansion, it must issue 1,000 bonds with a face value of $2,000 dollars each.
Therefore, bondholders will be promised repayment of the same face value amount at a date assigned as the maturity date. In addition, bondholders will also receive regular interest payments all throughout the intervening years.
Commercial Paper – This corporate debt is typically short-term with a maturity of about 270 days or less.