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{{Other uses}} |
{{Other uses}} |
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{{Distinguish|Debit}} |
{{Distinguish|Debit}} |
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{{Use dmy dates|date=April 2016}} |
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{{Use American English|date=April 2016}} |
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{{TAFI}} |
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{{Refimprove|date=January 2009}} |
{{Refimprove|date=January 2009}} |
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[[File:Payday loan shop window.jpg|thumb|right |
[[File:Payday loan shop window.jpg|thumb|right|[[Payday loan]] businesses lend money to customers, who then owe a debt to the payday loan company.]] |
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{{Corporate finance}} |
{{Corporate finance}} |
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{{Personal finance}} |
{{Personal finance}} |
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'''Debt''' refers to something that is owed or due either [[Physical property|physically]] or [[metaphor|metaphorically]]. In the physical sense, the [[Party (law)|parties]] to debt are [[Loan|lenders]] (those who give) and [[Debtor|borrowers]] (those who receive). In the metaphorical sense, debt refers to a [[moral obligation]] not based on [[Physical property|physical value]] (e.g.: debt of gratitude). |
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A '''debt''' generally refers to something owed by one party, the borrower or [[debtor]], to a second party, the lender or [[creditor]]. The lender or creditor can be a [[bank]], [[credit card]] company, [[payday loan]] provider, or an individual. One country can also lend money to another country. Debt is generally subject to [[contractual term]]s regarding the amount and timing of repayments of [[Principal (finance)|principal]] and [[interest]].<ref>{{cite web|url=http://www.investopedia.com/terms/d/debt.asp|title=Debt Definition|publisher=Investopedia|accessdate=16 May 2012}}</ref> The term can also be used [[metaphor]]ically to cover [[morality|moral]] obligations and other interactions not based on [[economic value]].<ref>{{OED|debt}}</ref> For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person. |
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Debt was the first form of commerce ([[Barter|barter system]]) documented in human history and existed about 2,900 years prior to the invention of [[Money|coinage]]. Today there are many examples of [[Loan|lenders]] of [[Money|monetary]] debt that include [[Sovereign state|sovereign nations]], [[Bank|banks]], [[credit card]] companies, [[payday loan]] providers, individuals, etc., who in many instances subject their borrowers to [[contractual term|contractual terms]] that designate the amount and timing of repayments of the debt and that frequently include the payment of [[Principal (finance)|principal]] and [[interest]]. <ref>{{cite web|url=http://www.investopedia.com/terms/d/debt.asp|title=Debt Definition|publisher=Investopedia|accessdate=16 May 2012}}</ref> |
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== Etymology == |
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The word debt is based on the [[Latin]] word ''debitum'' (meaning: something owed/thing owed) whose [[Participle|past participle]] ''debere'' means owe/to owe. In [[Old French]] this Latin word was changed to ''dete'' and in [[Middle English]] to ''dette'' with its modern day [[French language|French]] and [[English language|English]] spelling being debt. |
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== History == |
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{{Main|History of money}} |
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[[Anthropologist]] [[David Graeber]] in his award winning book <ref>http://www.mhpbooks.com/books/debt/</ref> <ref>http://www.spectator.co.uk/2012/11/books-of-the-year-12/</ref> [[Debt: The First 5000 Years]] writes that trade started with debt (the promise to pay later for already handed over goods) around 3500 BC with coinage not being invented until about 2,900 years later around 600 BC. Gerber further points out that: |
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*The word freedom originally meant ''freedom from debt''. |
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*Traditional democracy and constitutional government were created largely in reaction to rebellions over debt. |
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*The great traditions of religion and philosophy began by rejecting the idea that debt is the basis of morality. |
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*The cocept of investment capital originated in medievel Chinese Buddhism. |
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*Free market populism originated in medieval Islam with the creation of extensive debt systems based solely on trust.<ref>{{Cite news|last=Graeber|first=David|url=http://www.huffingtonpost.com/david-graeber/history-debt_b_913419.html|title=9 Things You Didn’t Know About The History Of Debt|date =September 8, 2011|work =[[The Huffington Post]]|access-date =April 23, 2016}}</ref><ref>{{cite book |last=Graeber |first=David |date=July 2011 |title=Debt: The First 5000 Years |url=http://www.mhpbooks.com/books/debt/ |location= |publisher=[[Melville House Publishing]] |page= |isbn=9781933633862}}</ref><ref>{{cite web|url=http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html|title=What is Debt? – An Interview with Economic Anthropologist David Graeber |
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|accessdate=23 April 2016}}</ref> |
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== Terms == |
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=== Interest === |
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===Interest=== |
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[[Interest]] is the fee charged by the [[creditor]] to the [[debtor]]. Interest is generally calculated as a percentage of the principal sum per year, which percentage is known as an [[interest rate]], and is generally paid periodically at intervals, such as monthly or semi-annually. |
[[Interest]] is the fee charged by the [[creditor]] to the [[debtor]]. Interest is generally calculated as a percentage of the principal sum per year, which percentage is known as an [[interest rate]], and is generally paid periodically at intervals, such as monthly or semi-annually. |
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Interest rates may be [[Fixed interest rate loan|fixed]] or [[Floating interest rate#floating rate loan|floating]]. In floating-rate structures, the rate of interest that the borrower pays during each time period is tied to a benchmark such as [[LIBOR]] or, in the case of [[inflation-indexed bond]]s, [[inflation]]. |
Interest rates may be [[Fixed interest rate loan|fixed]] or [[Floating interest rate#floating rate loan|floating]]. In floating-rate structures, the rate of interest that the borrower pays during each time period is tied to a benchmark such as [[LIBOR]] or, in the case of [[inflation-indexed bond]]s, [[inflation]]. |
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For some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid. This may be because upfront fees or [[point (mortgage)|points]] are charged, or because the loan has been structured to be [[Islamic banking|sharia-compliant]]. The additional principal due at the end of the term has the same economic effect as a higher interest rate. This is sometimes referred to as a [[wikt:banker's dozen|banker's dozen]], a play on "[[baker's dozen]]" – owe twelve (a dozen), receive a loan of eleven (a banker's dozen). Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($ |
For some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid. This may be because upfront fees or [[point (mortgage)|points]] are charged, or because the loan has been structured to be [[Islamic banking|sharia-compliant]]. The additional principal due at the end of the term has the same economic effect as a higher interest rate. This is sometimes referred to as a [[wikt:banker's dozen|banker's dozen]], a play on "[[baker's dozen]]" – owe twelve (a dozen), receive a loan of eleven (a banker's dozen). Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($11{{ndash}}$10)/$10 = 10 percent interest; however, if one borrows $9 and must repay $10, then this is ($10–$9)/$9 = 11-1/9 percent interest.<ref>Formally, a discount of ''d''% results in effective interest of <math>d/(1-d)\%.</math></ref> |
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There are three main ways repayment may be structured: the entire principal balance may be due at the maturity of the loan; the entire principal balance may be [[Amortization (business)|amortized]] over the term of the loan; or the loan may partially amortize during its term, with the remaining principal due as a "[[balloon payment]]" at maturity. Amortization structures are common in [[mortgage]]s and [[credit card]]s. |
There are three main ways repayment may be structured: the entire principal balance may be due at the maturity of the loan; the entire principal balance may be [[Amortization (business)|amortized]] over the term of the loan; or the loan may partially amortize during its term, with the remaining principal due as a "[[balloon payment]]" at maturity. Amortization structures are common in [[mortgage]]s and [[credit card]]s. |
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===Collateral and recourse=== |
=== Collateral and recourse === |
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A debt obligation is considered secured if creditors have recourse to specific [[collateral (finance)|collateral]]. Collateral may include claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case of a consumer). Unsecured debt comprises financial obligations for which creditors do not have recourse to the [[assets]] of the borrower to satisfy their claims. |
A debt obligation is considered secured if creditors have recourse to specific [[collateral (finance)|collateral]]. Collateral may include claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case of a consumer). Unsecured debt comprises financial obligations for which creditors do not have recourse to the [[assets]] of the borrower to satisfy their claims. |
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==Types of Borrowers== |
== Types of Borrowers == |
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===Individuals=== |
=== Individuals === |
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Common types of debt owed by individuals and households include [[mortgage loan]]s, car loans, and [[credit card]] debt. For individuals, debt is a means of using anticipated [[income]] and future [[purchasing power]] in the present before it has actually been earned. Commonly, people in |
Common types of debt owed by individuals and households include [[mortgage loan]]s, car loans, and [[credit card]] debt. For individuals, debt is a means of using anticipated [[income]] and future [[purchasing power]] in the present before it has actually been earned. Commonly, people in industrialized nations use consumer debt to purchase houses, cars and other things too expensive to buy with cash on hand. |
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People are more likely to spend more and get into debt when they use credit cards vs. cash for buying products and services.<ref>Chatterjee, P., & Rose, R. L. (2012). Do payment mechanisms change the way consumers |
People are more likely to spend more and get into debt when they use credit cards vs. cash for buying products and services.<ref>Chatterjee, P., & Rose, R. L. (2012). Do payment mechanisms change the way consumers |
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perceive products? Journal of Consumer Research, 38(6), |
perceive products? Journal of Consumer Research, 38(6), 1129–1139.</ref><ref>Pettit, N. C., & Sivanathan, N. (2011). The plastic trap. Social Psychological and Personality Science, 2(2), 146-153.</ref><ref name="auto">Prelec, D. & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.</ref><ref name="auto1">Raghubir, P. & Srivastava, J. (2008), Monopoly money: The effect of payment coupling and form on spending behavior. Journal of Experimental Psychology: Applied, 14 (3), 213–25.</ref><ref>Soman, D. (2003). The effect of payment transparency on consumption: Quasi |
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experiments from the field. Marketing Letters, 14, 173–183.</ref> This is primarily because of the transparency effect and consumer’s “pain of paying.” <ref name="auto"/><ref name="auto2">Soman, D. (2003). The effect of payment transparency on consumption: Quasi experiments from the field. Marketing Letters, 14, 173–183.</ref> The transparency effect refers to the fact that the further you are from cash (as in a credit card or another form of payment), the less transparent it is and the less you remember how much you spent.<ref name="auto2"/> The less transparent or further away from cash, the form of payment employed is, the less an individual feels the “pain of paying” and thus is likely to spend more.<ref name="auto"/> Furthermore, the differing physical appearance/form that credit cards have from cash may cause them to be viewed as “monopoly” money vs. real money, luring individuals to spend more money than they would if they only had cash available.<ref name="auto1"/><ref>Chatterjee, P., & Rose, R. L. (2012). Do payment mechanisms change the way consumers perceive products? Journal of Consumer Research, 38(6), |
experiments from the field. Marketing Letters, 14, 173–183.</ref> This is primarily because of the transparency effect and consumer’s “pain of paying.” <ref name="auto" /><ref name="auto2">Soman, D. (2003). The effect of payment transparency on consumption: Quasi experiments from the field. Marketing Letters, 14, 173–183.</ref> The transparency effect refers to the fact that the further you are from cash (as in a credit card or another form of payment), the less transparent it is and the less you remember how much you spent.<ref name="auto2" /> The less transparent or further away from cash, the form of payment employed is, the less an individual feels the “pain of paying” and thus is likely to spend more.<ref name="auto" /> Furthermore, the differing physical appearance/form that credit cards have from cash may cause them to be viewed as “monopoly” money vs. real money, luring individuals to spend more money than they would if they only had cash available.<ref name="auto1" /><ref>Chatterjee, P., & Rose, R. L. (2012). Do payment mechanisms change the way consumers perceive products? Journal of Consumer Research, 38(6), 1129–1139.</ref> |
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</ref> |
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⚫ | Besides these more formal debts, private individuals also lend informally to other people, mostly relatives or friends. One reason for such informal debts is that many people, in particular those who are poor, have no access to affordable credit. Such debts can cause problems when they are not paid back according to expectations of the lending household. In 2011, 8 percent of people in the [[European Union]] reported their households has been in arrears, that is, unable to pay as scheduled "payments related to informal loans from friends or relatives not living in your household".<ref>{{cite web|url=http://www.eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2013/73/en/2/EF1373EN.pdf|title=Household over-indebtedness in the EU: The role of informal debts.|last=|first=|date=2013|website=eurofound.europa.eu|publisher=Publications Office of the European Union, Luxembourg|access-date=19 April 2016}}</ref> |
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⚫ | Besides these more formal debts, private individuals also lend informally to other people, mostly relatives or friends. One reason for such informal debts is that many people, in particular those who are poor, have no access to affordable credit. Such debts can cause problems when they are not paid back according to expectations of the lending household. In 2011, 8 |
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A [[company]] may use various kinds of debt to [[finance]] its [[Business operations|operations]] as a part of its overall [[corporate finance]] strategy. |
A [[company]] may use various kinds of debt to [[finance]] its [[Business operations|operations]] as a part of its overall [[corporate finance]] strategy. |
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A company may also issue [[Bond (finance)|bonds]], which are debt [[security (finance)|securities]]. Bonds have a fixed lifetime, usually a number of [[year]]s; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as [[coupon (bond)|coupons]]) during the life of the bond. |
A company may also issue [[Bond (finance)|bonds]], which are debt [[security (finance)|securities]]. Bonds have a fixed lifetime, usually a number of [[year]]s; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as [[coupon (bond)|coupons]]) during the life of the bond. |
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A [[letter of credit]] or LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the [[land development]] process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the [[advising bank]] of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to [[giro]] |
A [[letter of credit]] or LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the [[land development]] process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the [[advising bank]] of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to [[giro]]s and [[traveler's cheque]]. Typically, the documents a beneficiary has to present in order to receive payment include a [[commercial invoice]], [[bill of lading]], and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin. |
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Companies also use debt in many ways to leverage the [[investment]] made in their [[asset]]s, "leveraging" the return on their [[Stock|equity]]. This [[leverage (finance)|leverage]], the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. |
Companies also use debt in many ways to leverage the [[investment]] made in their [[asset]]s, "leveraging" the return on their [[Stock|equity]]. This [[leverage (finance)|leverage]], the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. |
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===Governments=== |
=== Governments === |
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Governments issue debt to pay for ongoing expenses as well as major capital projects. Government debt may be issued by sovereign states as well as by local governments, sometimes known as municipalities. |
Governments issue debt to pay for ongoing expenses as well as major capital projects. Government debt may be issued by sovereign states as well as by local governments, sometimes known as municipalities. |
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The overall level of indebtedness by a government is typically shown as a ratio of debt-to-GDP. This ratio helps to assess the speed of changes in government indebtedness and the size of the debt due. |
The overall level of indebtedness by a government is typically shown as a ratio of debt-to-GDP. This ratio helps to assess the speed of changes in government indebtedness and the size of the debt due. |
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==Default== |
== Default == |
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Debtors of every type [[default (finance)|default]] on their debt from time to time, with various consequences depending on the terms of the debt and the law governing default in the relevant jurisdiction. Riskier borrowers must generally pay higher rates of interest to compensate lenders for taking on the additional risk of default. Debt investors assess the risk of default prior to making a loan, for example through credit scores and corporate and sovereign ratings. |
Debtors of every type [[default (finance)|default]] on their debt from time to time, with various consequences depending on the terms of the debt and the law governing default in the relevant jurisdiction. Riskier borrowers must generally pay higher rates of interest to compensate lenders for taking on the additional risk of default. Debt investors assess the risk of default prior to making a loan, for example through credit scores and corporate and sovereign ratings. |
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International [[Third World debt]] has reached the scale that many [[economist]]s are convinced that [[debt cancellation]] is the only way to restore global equity in relations with the [[developing nation]]s.{{Citation needed|date=January 2012}} |
International [[Third World debt]] has reached the scale that many [[economist]]s are convinced that [[debt cancellation]] is the only way to restore global equity in relations with the [[developing nation]]s.{{Citation needed|date=January 2012}} |
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==Debt markets== |
== Debt markets == |
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===Market interest rates=== |
=== Market interest rates === |
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{{ |
{{Main|Bond valuation}} |
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===Loans versus bonds=== |
=== Loans versus bonds === |
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[[Bond (finance)|Bonds]] are debt [[security (finance)|securities]], tradeable on a [[bond market]]. A country's regulatory structure determines what qualifies as a security. For example, in North America, each [[security (finance)|security]] is uniquely identified by a [[CUSIP]] for trading and settlement purposes. |
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In contrast, [[loan]]s are not [[security (finance)|securities]] and do not have [[CUSIP]]s (or the equivalent). Loans may be sold or acquired in certain circumstances, as when a bank [[syndicated loan|syndicates]] a loan. |
[[Bond (finance)|Bonds]] are debt [[security (finance)|securities]], tradeable on a [[bond market]]. A country's regulatory structure determines what qualifies as a security. For example, in North America, each [[security (finance)|security]] is uniquely identified by a [[CUSIP]] for trading and settlement purposes. In contrast, [[loan]]s are not [[security (finance)|securities]] and do not have [[CUSIP]]s (or the equivalent). Loans may be sold or acquired in certain circumstances, as when a bank [[syndicated loan|syndicates]] a loan. |
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Loans can be turned into securities through the [[securitization]] process. In a securitization, a company sells a pool of assets to a securitization trust, and the securitization trust finances its purchase of the assets by selling [[ |
Loans can be turned into securities through the [[securitization]] process. In a securitization, a company sells a pool of assets to a securitization trust, and the securitization trust finances its purchase of the assets by selling [[Debt securities|securities]] to the market. For example, a trust may own a pool of home [[mortgage loan|mortgages]], and be financed by [[residential mortgage-backed security|residential mortgage-backed securities]]. In this case, the asset-backed trust is a debt issuer of [[residential mortgage-backed security|residential mortgage-backed securities]]. |
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[[Central bank]]s, such as the U.S. [[Federal Reserve System]], play a key role in the debt markets. Debt is normally denominated in a particular [[currency]], and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to [[inflation]] or [[Deflation (economics)|deflation]], so it can happen even though the borrower and the lender are using the same [[currency]]. |
[[Central bank]]s, such as the U.S. [[Federal Reserve System]], play a key role in the debt markets. Debt is normally denominated in a particular [[currency]], and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to [[inflation]] or [[Deflation (economics)|deflation]], so it can happen even though the borrower and the lender are using the same [[currency]]. |
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===Role of rating agencies=== |
=== Role of rating agencies === |
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Specific bond debts owed by both governments and private corporations are rated by [[Credit rating agency|rating agencies]], such as [[Moody's]], [[Standard & Poor's]], [[Fitch Ratings]], and [[A. M. Best]]. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a [[credit rating]]. Moody's uses the letters ''Aaa Aa A Baa Ba B Caa Ca C'', where ratings ''Aa-Caa'' are qualified by numbers 1-3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. |
Specific bond debts owed by both governments and private corporations are rated by [[Credit rating agency|rating agencies]], such as [[Moody's]], [[Standard & Poor's]], [[Fitch Ratings]], and [[A. M. Best]]. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a [[credit rating]]. Moody's uses the letters ''Aaa Aa A Baa Ba B Caa Ca C'', where ratings ''Aa-Caa'' are qualified by numbers 1-3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. |
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A change in ratings can strongly affect a company, since its cost of [[refinancing]] depends on its [[creditworthiness]]. Bonds below Baa/BBB (Moody's/S&P) are considered [[junk bonds|junk]] or high-risk bonds. Their high risk of default (approximately 1.6 |
A change in ratings can strongly affect a company, since its cost of [[refinancing]] depends on its [[creditworthiness]]. Bonds below Baa/BBB (Moody's/S&P) are considered [[junk bonds|junk]] or high-risk bonds. Their high risk of default (approximately 1.6 percent for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to [[Default (finance)|default]] on his debt. These types of debt are frequently repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable investment. |
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== Criticisms == |
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{{ |
{{Main|Criticism of debt}} |
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The [[anthropologist]] [[David Graeber]] argues in ''[[Debt: The First 5000 Years]]'' that trade starts with some sort of credit namely the promise to pay later for already handed over goods. Therefore, credit and debt existed even before coins.<ref>David Graeber: Debt: The First 5000 Years, Melville 2011. Cf. http://www.socialtextjournal.org/reviews/2011/10/review-of-david-graebers-debt.php</ref><ref>{{cite web|url=http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html|title=What is Debt? – An Interview with Economic Anthropologist David Graeber |
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The word "debt" comes from the French ''dette'' and ultimately Latin ''debere'' (to owe), from ''de habere'' (to have).<ref>{{cite web|url=http://dictionary.reference.com/browse/debt|title=Debt - Define Debt at Dictionary.com|work=Dictionary.com}}</ref><ref>{{cite web|url=http://www.merriam-webster.com/dictionary/debt|title=Debt - Definition of debt by Merriam-Webster|work=merriam-webster.com}}</ref> The letter ''b'' in the word ''debt'' was reintroduced in the 18th century, possibly by [[Samuel Johnson]] in his ''[[A Dictionary of the English Language]]'' (1755), as several other words that had existed without a ''b'' had them reinserted at around that time. |
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==Criticisms== |
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{{main|Criticism of debt}} |
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Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. [[Islamic banking|Islam forbids lending with interest]] even today. In hard times, the cost of servicing debt can grow beyond the debtor's ability to pay, due to either external events (income loss) or internal difficulties (poor management of resources). |
Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. [[Islamic banking|Islam forbids lending with interest]] even today. In hard times, the cost of servicing debt can grow beyond the debtor's ability to pay, due to either external events (income loss) or internal difficulties (poor management of resources). |
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Excessive debt accumulation has been blamed for exacerbating economic problems. For example, before the [[Great Depression]], the [[debt-to-GDP ratio]] was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a [[credit crunch]] followed. [[deflation (economics)|Deflation]] effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their [[Consumption (economics)|consumption]] and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more [[bankruptcy|bankruptcies]] also occurred due both to increased debt cost caused by deflation and the reduced demand. |
Excessive debt accumulation has been blamed for exacerbating economic problems. For example, before the [[Great Depression]], the [[debt-to-GDP ratio]] was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a [[credit crunch]] followed. [[deflation (economics)|Deflation]] effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their [[Consumption (economics)|consumption]] and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more [[bankruptcy|bankruptcies]] also occurred due both to increased debt cost caused by deflation and the reduced demand. |
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At the household level, debts can also have detrimental effects. In particular when households make spending decisions assuming income to increase, or remain stable, for the years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment, relationship break-up, leaving the parental home, business failure, illness, or home repairs. Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental health,<ref>{{cite journal | title=The relationship between debt and mental health: a systematic review. | author=Fitch | journal=Mental Health Review Journal | year=2011 | volume=16 | issue=4 | pages=153–166 | doi=10.1108/13619321111202313|display-authors=etal}}</ref> family stress, stigma, difficulty obtaining employment, exclusion from basic financial services ([[European Commission]], 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim ''et al.'', 2003), feeling of insecurity, and relational tensions.<ref>{{cite web | url=http://eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2010/70/en/2/EF1070EN.pdf | title=Managing household debts: Social service provision in the EU. Working paper. Dublin: European Foundation for the Improvement of Living and Working Conditions | publisher=European Foundation for the Improvement of Living and Working Conditions | date=2010 | accessdate=20 February 2015 | author=Dubois, Hans |
At the household level, debts can also have detrimental effects. In particular when households make spending decisions assuming income to increase, or remain stable, for the years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment, relationship break-up, leaving the parental home, business failure, illness, or home repairs. Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental health,<ref>{{cite journal | title=The relationship between debt and mental health: a systematic review. | author=Fitch | journal=Mental Health Review Journal | year=2011 | volume=16 | issue=4 | pages=153–166 | doi=10.1108/13619321111202313|display-authors=etal}}</ref> family stress, stigma, difficulty obtaining employment, exclusion from basic financial services ([[European Commission]], 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim ''et al.'', 2003), feeling of insecurity, and relational tensions.<ref>{{cite web | url=http://eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2010/70/en/2/EF1070EN.pdf | title=Managing household debts: Social service provision in the EU. Working paper. Dublin: European Foundation for the Improvement of Living and Working Conditions | publisher=European Foundation for the Improvement of Living and Working Conditions | date=2010 | accessdate=20 February 2015 | author=Dubois, Hans | author2=Anderson, Robert}}</ref> |
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==Levels and flows== |
== Levels and flows == |
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{{Main|Debt levels and flows}} |
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== See also == |
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{{Portal|Economics}} |
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* [[Debt theory of money]] |
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{{Debt}} |
{{Debt}} |
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{{authority control}} |
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[[Category:Debt|*]] |
[[Category:Debt|*]] |
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[[Category:Personal financial problems]] |
[[Category:Personal financial problems]] |
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[[Category:Social problems]] |
[[Category:Social problems]] |
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[[es:Deuda]] |
[[es:Deuda]] |