Debt is when something, usually money, is owed by one party, the borrower or the debtor, to the second party, the lender or the creditor. The debt may be owed by a sovereign state or country, a local government, a company, or an individual. Debts are generally subject to contractual terms regarding the amount and timing of principal and interest repayments. Loans, bonds, securities, and mortgages are all kinds of debt. This term can also be used metaphorically to cover moral obligations and other interactions that are not based on economic value. For example, in Western culture, a person who is assisted by a second person is sometimes said to owe a "debt of gratitude" to a second person.
Video Debt
Etymology
The term "debt" in English was first used in the late 13th century. The term "debt" is derived from "dette, from Old French dete, from the Latin debetum" owed, "neutral past participle from debere" to owe, "originally," keep something away from someone, "from de-" away "(see de-) habere "to have" (see custom (n.).) Recovered spell [used] after 1400. The term "borrower" was first related to use in English as well as at the beginning of the 13th century; "dett, dettour , [coming] from the Old French detour, from the debtor "debter", from the past participle stem of debere;... The -b- restored in French later, and in English c. 1560-c. 1660. "In the King James Bible, various spellings are used: spelling" detter [used] three times, three times debtor, debtor twice, and debt once. "
Maps Debt
Requirements
Interest
Interest is the cost that the borrower pays to the lender. Interest is calculated as a percentage of the outstanding principal, the percentage known as the interest rate, and is generally paid periodically at intervals, such as monthly or semi-annual.
Interest rates can be fixed or floating. In a floating rate structure, the interest rate the borrower pays during each time period is tied to a benchmark such as LIBOR or, in the case of inflation index bonds, inflation.
There are many different conventions to calculate interest. Depending on the terms of the debt, compound interest may accumulate at certain intervals. In addition, different day counting conventions exist, for example, sometimes each month is considered to have exactly thirty days, so interest payments are due in the same calendar month. Annual percentage rate (APR) is the standard way to calculate and compare interest rates every year. Quoting interest rates using APR is required by regulation for the majority of loans to individuals in the United States and the United Kingdom.
For some loans, the actual amount lent to the debtor is less than the principal amount to be repaid. This may be because the fees or points in advance are charged, or because the loan has been compiled to conform to sharia. Additional principal maturities at the end of the semester have the same economic effect as higher interest rates.
Borrowers at risk generally have to pay higher interest rates to compensate the lender for taking the added risk of default. Debt investors assess the risk of default before making a loan, for example through credit scores and ratings of companies and countries.
Reissue
There are three main ways of payment that may be structured: the entire principal balance may be due on the due date of the loan; all principal balances can be amortized over the term of the loan; or the loan may be amortized partially over the term of its term, with the remaining principal being due as "balloon payments" at maturity. The amortization structure often occurs on mortgages and credit cards.
Default terms
Debtors of any kind fail to pay for their debts from time to time, with consequences depending on the terms of the debt and the law governing defaults in the relevant jurisdiction. If debt is secured by a special collateral, such as a car or a house, the creditor may ask to take back the collateral. In more serious circumstances, individuals and companies can go bankrupt.
Type of borrower
Individual
Common types of debt held by individuals and households include mortgage loans, car loans, and credit card debt. For individuals, debt is a means to use anticipated earnings and future purchasing power in the present before it is actually acquired. Generally, people in industrialized countries use consumer debt to buy homes, cars, and anything else that is too expensive to buy with cash.
People are more likely to spend more and owe when they use credit cards vs. cash to buy products and services. This is primarily due to the effects of transparency and consumer "feelings of pay". The transparency effect refers to the fact that the farther you are from cash (as in credit cards or other forms of payment), the less transparent and the less you remember how much you spend. The less transparent or further away from the cash, the form of payment used is, the less one feels the "pain of pay" and thus likely to spend more. In addition, the different physical forms/forms that credit cards possess from cash can cause them to be viewed as "monopoly" money versus real money, luring individuals to spend more money than if they only have the cash available.
In addition to this more formal debt, private individuals also lend informally to others, mostly relatives or friends. One reason for the informal debt is that many people, especially the poor, do not have access to affordable credit. Such debt can cause problems when they are not repaid in line with the expectations of the lender's household. In 2011, 8 percent of people in the EU reported that their households were in arrears, unable to pay on "payments related to informal loans of friends or relatives who did not live in your home".
Business
A company can use different types of debt to finance its operations as part of the overall corporate financial strategy.
Term loan is the simplest form of corporate debt. It consists of an agreement to lend a fixed sum of money, called the principal amount or principal, for a certain period of time, with this amount to be paid on a certain date. In commercial credit interest, calculated as a percentage of the principal amount per annum, shall also be paid on such date, or may be paid periodically in intervals, such as annual or monthly. Such a loan is also called "bullet loan", especially if there is only a single payment at the end - "bullet" - without "flow" interest payments during the loan term.
A syndicated loan is a loan granted to a company that wants to borrow more money than a single lender who is willing to take a risk on a single loan. Syndicated loans are provided by a group of lenders and are structured, managed and managed by one or more commercial banks or investment banks known as arranger. Syndicated credit is a risk management tool that allows banks to lead debt guarantees to reduce risks and free up loan capacity.
A company can also issue bonds, which are debt securities. Bonds have a fixed lifetime, usually several years; with long-term ties, which lasted for 30 years, became less common. At the end of the bond period, the money must be paid in full. Interest can be added to final payment, or can be paid in regular installments (known as coupons) during the term of the bond.
Letters of credit or LC can also be a source of payment for a transaction, which means that redeeming a letter of credit will pay the exporter. Letter of credit is used primarily in significant international trade transactions, for transactions between suppliers in one country and customers in another. They are also used in land development processes to ensure that approved public facilities (roads, sidewalks, storm pools, etc.) will be built. Parties in the letter of credit are usually beneficiaries who will receive money, the issuing bank where the applicant is the client, and the advising bank in which the recipient is a client. Almost all credit letters can not be canceled, that is, can not be changed or canceled without prior approval from the recipient, the issuing bank and the bank confirming, if any. In conducting transactions, letter of credit incorporates common functions for travel giros and checks. Typically, the documents that the recipient must submit to receive payments include commercial invoices, bill of lading, and documents proving that the shipment is insured against loss or damage in transit. However, the list and form of the document is open to imagination and negotiation and may contain requirements for presenting documents issued by a neutral third party proving the quality of the goods shipped, or their place of origin.
Companies also use debt in many ways to increase investments made in their assets, "leveraging" their return on equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the more risky.
Government
The government issues debts to pay ongoing expenditures as well as large capital projects. Government debt can be issued by sovereign states as well as by local governments, sometimes known as municipalities.
The overall level of debt by the government is usually shown as the ratio of debt to GDP. This ratio helps assess the speed of changes in government debt and the amount of debt that matures.
Creditworthiness rating
Income metrics
The ratio of debt service coverage is the ratio of available income to the amount of debt service to be paid (including amortization of interest and principal, if any). The higher the debt service coverage ratio, the more income available to pay for debt services, and the easier and cheaper for borrowers to obtain financing.
Different debt markets have somewhat different conventions in terminology and calculations for income-related metrics. For example, in a mortgage loan in the United States, the debt-to-income ratio typically includes the cost of mortgage payments as well as insurance and property taxes, divided by the consumer's monthly income. A "front-end ratio" of 28% or lower, together with a "back-end ratio" (including compulsory payments for non-housing debt as well) of 36% or lower is also required to qualify for an appropriate loan.
Value metrics
The ratio of the loan to the value is the ratio of the total loan amount to the total value of the guarantee that secures the loan.
For example, in mortgage lending in the United States, the borrow-to-value concept is most often expressed as a "down payment". A 20% down payment equals an 80% loan to the value. With home purchase, the value can be assessed using an agreed purchase price, and/or valuation.
Warranty and other road
A debt obligation is considered safe if the creditor asks for a special guarantee. Warranties may include claims for tax receipts (in the case of government), special assets (in the case of companies) or homes (in the case of consumers). Unsecured debt consists of financial liabilities that the creditor has no recourse to the borrower's assets to fulfill their claims.
Role of rating agency
Credit bureaus collect information about loan history and consumer repayments. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risks posed by borrowing money to consumers. In the United States, the main credit bureaus are Equifax, Experian, and TransUnion.
Debts held by government and private companies can be assessed by rating agencies, such as Moody's, Standard & amp; Poor's, Fitch Ratings, and A. M. Best. The government or the company itself will also be given its own rank. These institutions assess the debtor's ability to respect his obligations and thereby grant him credit ratings. Moody's uses the letters of Aaa Aa A Baa Ba B Caa Ca C , in which the rank Aa-Caa is eligible with numbers 1-3. S & amp; P and other rating agencies have slightly different systems using capital letters and/- qualifications. So a government or a high ranking company will have a Aaa rating.
Ranking changes greatly affect the company, as the cost of financing depends on its creditworthiness. Bonds under Baa/BBB (Moody's/S & amp; P) are considered junk or high-risk bonds. The high risk of their failure (about 1.6 percent for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (in part or in whole) be settled by the debtor. The debtor is said to default on the debt. This type of debt is often repackaged and sold below par value. Buying junk bonds is seen as a risky but potentially profitable investment.
The debt market
Market rates
Loan versus bond
Bond is a bond, can be traded in the bond market. The governing structure of a country determines what qualifies as security. For example, in North America, each security is uniquely identified by CUSIP for trading and settlement purposes. Conversely, loans are not securities and do not have CUSIP (or equivalent). Loans can be sold or acquired under certain circumstances, such as when banks syndicate loans.
Loans can be converted into securities through the securitization process. In securitization, the company sells a set of assets for securitization trust, and securitization trust finances asset purchases by selling securities to the market. For example, trust can have a collection of home mortgages, and is financed by mortgage-backed mortgage housing. In this case, asset-backed confidence is the issuer of securities debt backed mortgage housing.
The role of the central bank
Central banks, such as the US Federal Reserve System, play a key role in the debt market. Debt is usually denominated in a particular currency, and hence changes in the valuation of the currency can change the effective size of debt. This can happen because of inflation or deflation, so it can happen even if borrowers and lenders use the same currency.
Criticism
Some oppose debt as instruments and institutions, on a personal, family, social, corporate and government level. Islam prohibits loans with interest even today. In difficult times, the cost of debt payments can grow beyond the ability of debtors to pay, either because of external events (loss of income) or internal difficulties (poor resource management).
Debt will increase over time if not paid faster than growing through interest. This effect may be called riba, while the term "riba" in another context refers only to excessive interest rates, exceeding a reasonable profit on the risks received.
In the thought of international law, odious debts are debts incurred by the regime for purposes that do not serve the interests of the state. Such debt is perceived by this doctrine as the personal debt of the regime that expels them and not the state debt. The Third World Debt International has reached a scale that many economists believe that debt cancellation or debt cancellation is the only way to restore global equity in relations with developing countries.
Excessive debt accumulation has been blamed for exacerbating economic problems. For example, before the Great Depression, the debt to GDP ratio was very high. The economic agent is deeply indebted. This excess debt, equivalent to the excessive expectations of future returns, is accompanied by asset bubbles in the stock market. When expectations are corrected, deflation and credit crunch are followed. Deflation effectively makes debt more expensive and, as Fisher explains, it strengthens deflation again, because, to reduce their debt levels, economic agents reduce their consumption and investment. Reduced demand reduces business activity and causes further unemployment. In a more direct sense, more bankruptcies also occur either because of rising debt costs caused by deflation and reduced demand.
At the household level, debt can also have an adverse effect - especially when households make spending decisions with the assumption that revenues will increase, or remain stable, in the coming years. When households take credit under this assumption, life events can easily turn debt into excess debt. Such life events include unexpected unemployment, broken relationships, leaving home parents, business failures, illness, or home improvement. Excessive loans have severe social consequences, such as financial difficulties, poor physical and mental health, family pressure, stigma, difficulty getting jobs, exclusion from basic financial services (EC, 2009), occupational accidents and industrial diseases, tensions in social relationships (Carpentier and Van den Bosch, 2008), workplace absenteeism and lack of organizational commitment (Kim et al. , 2003), insecurity, and relational tension.
Rate and flow
Global debt deferral grew 4.3 percent year-on-year to US $ 5.19 trillion during 2004. It is expected to increase in the coming years if the spending habits of millions of people across the world continues as they do.
History
Traditions in some cultures demand that debt be forgiven regularly (often yearly), to prevent systemic injustice between groups in society, or anyone who becomes specialist in holding debt and forcing repayments. An example is the Jubilee of the Bible, described in the Book of Leviticus.
See also
- The money debt theory
References
Source of the article : Wikipedia
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