This guide will explain to you about debt certificates and why an investor purchases them. When considering various investment types, the debt certificate is also leading among the investors. They purchase them, and they serve as a very important way of raising funds. They help in providing the investors with predictable returns, which is very beneficial for them.
Please get to know about the complete details regarding the debt certificates and how the investors purchase them. Along with this, you will also get to know the benefits of purchasing the certificates and the different types available in the market.
What is a Debt Certificate?
A debt certificate comprises of a financial document that the investors purchase. It is provided to the investors the same as any government document. This helps in repaying the borrowed amount along with the interest after a designated period. So, it is also considered as a formal agreement between the purchaser, who is the investor, and the seller.
In this way, the investor receives a good income and promises to repay it in a certain period. Along with this, the seller also gets good capital in return. So, there are different types of debt certificates. The following are some of them:
- Bonds
- Debentures
- Notes
- Certificate of deposit
Why do Investors Buy Debt Certificates?
Following are some of the reasons for purchasing the debt certificate by the investors:
Steady Income
The debt certificate provides you with the regular interest. So, you will be getting a good cash flow on your investment. In this way, the intermediate investors or the advanced investors who have put a large amount of money into purchasing the debt certificate can get a steady income flow. It will be helpful in maintaining their regular works which require a large amount of money.
Low Risk
Purchasing the debt certificate also provides you with reduced risk. This is because different types of debt certificates help provide you with more benefits as compared to stocks. Moreover, they are not completely risk-free. Rather, they have less risk because of less market volatility.
Diversification
The debt certificate can help in diversifying your portfolio. This will help in reducing the risk of your investment. Furthermore, it will also help you in enhancing your diversification of investment. It will also help in providing you with good returns from various networks.
Risk Factors To Consider
Here are some of the risk factors that are associated with the investors buying the debt certificate. You should consider them before purchasing the certificate.
- Default Risk: In this, the issuer of the debt certificate fails to provide you with the interest on your investment.
- Interest Rate Risk: If the rate on the investment rises, then the certificate will be of less value. This is because the newly issued certificates will provide good returns and maximize revenue. So, this interest rate risk will also be causing harm to the investors.
- Inflation Risk: If inflation is high, then the fixed payments from the investors can be of less value. This can cause you a very minimized return on your investment. Also, it will not be valuable for you in case of high inflation.
- Liquidity Risk: Some debt certificates are very hard to sell. So, if the selling process becomes very difficult, then their liquidity is having more risk as well, which is borne by the investors.
How Process Works?
The following are the steps involved in buying the debt certificate by the investor:
Investment Requires Money
The first step includes providing money to the issue of the debt certificate. This can be the government organization or any company that will require funds and expands its project. Moreover, this point will be helpful in increasing the operations of the company, which will require many expenses.
Issuance of Debt Certificate
Once the company or the government organization receives the funds, then they create a certificate relying on various terms and conditions. It also comprises of interest rate, repayment date and other policies regarding the return on the investment.
Purchasing Certificate
Once the debt certificate is issued, the investor then purchases it from the issuer. In this way, the investor provides money and gets it.
Investor Receive Return
The last step is in which the issuer pays a return to the investor on his investment. This payment is done on a periodic basis, including annually or semi-annually. So, when maturity is achieved, then the issuer will pay the principal amount to the investor.
FAQs
1. How do debt certificates differ from stocks?
Ans. The debt certificate represents a loan to the issuing person, while the stocks represent the ownership of a company. However, the debt certificate holders are usually paid before the stockholders if there is any case of bankruptcy.
2. What are some examples of debt certificates?
Ans. Some of the common examples include government bonds, treasury bills, certificates of deposit and corporate bonds.
3. How does an investor earn from the debt certification?
Ans. The investor gets regular interest over a designated period. He also receives the principal amount after the maturation of the certificate.
4. What are the risks of purchasing debt certificates?
Ans. The risks of investing in the debt certificate include inflation risk, default risk, liquidity risk and interest rate risk.
5. Can we sell the debt certificate before maturity?
Ans. Yes, in some cases the debt certificates can easily be sold on the secondary markets. But their selling price will differ from the original investment. It will depend on the market fluctuations.
Wrapping Up
So, now, if you are searching for how to purchase a debt certificate, then above mentioned is a complete guide. It is an excellent way to invest your money and get good profit and return. Moreover, there are some risks associated with the debt certificate as well. They are not the building blocks of your wealth but they help in preserving a certain amount of wealth and provide you a growth opportunity as well.