debt

the state of owing something (especially money)

"he is badly in debt" money or goods or services owed by one person to another an obligation to pay or do something

Debt is that which is owed. A person or company owing debt is called a debtor. An entity to whom debt is owed is called a creditor. Debt is used to borrow purchasing power from the future. Companies use debt as a part of their overall corporate finance strategy.

Payment - People or organisations often enter into agreements to borrow something. Both parties must agree on some standard of deferred payment, most usually a sum of money denominated as unit of accountunits of a currency, but sometimes a like good. For instance, one may borrow shares, in which case, one may pay for them later with the shares, plus a premium for the borrowing privilege, or the sum of money required to buy them in the market at that time.

Types of debt - There are numerous types of debt obligations. They include loans, bonds, mortgages and Promissory_notepromissory notes. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back with an agreed premium interest rate over time, or all at once at a later date (balloon payment). The amount of money outstanding is usually called a debt. The debt will increase through time if it is not repaid faster than it grows. In some systems of economics this effect is termed usury, in others, the term "usury" refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted.Large organizations can issue debt in the form of security (finance)securities, known as bonds. Each bond entitles the holder to interest and principal repayments. Bonds are traded in the bond markets, and are widely used as relatively safe investments. SecuritizationSecuritization occurs when a company lumps together a group of assets or recievables usually in different tranches determined by the riskiness of the debtor and sells them to the market through a trust. The cashflows from these receivables are used to pay the holders of this paper. Companies often do this in order to remove these assets from their balance sheets and monetize an asset. Although these assets are "removed" from the balance sheet and are supposed to be the responsibility of the trust, that does not end the company's involvement because the company often maintains what is called an interest only strip or first lost piece in the securitization. The piece that the company maintains gets hit first with any losses the trust may incur before any of the other investors see a loss. Meaning that the investor in a securitiztion would get paid in case there are massive defaults and the company who securitzed the assets would not get paid on its portion. The afformentioned brings into question whether the assets is truely of balance sheet given the company's commitment to keeping losses to investor at a minimum. Many rating agencies consider securitization debt because of their commitment to keeping these trusts loss free. If it has a cashflow coming in it can be securitized.

Debt, inflation and the exchange rate - As noted above, debt is normally denominated in a particular monetary 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. Thus it is important to agree on standards of deferred payment in advance, so that a degree of fluctuation will also be agreed as acceptable. It is for instance common to agree to "US dollar denominated" debt.The form of debt involved in banking gives rise to a large proportion of the money in most industrialised nations (see money and credit money for a discussion of this). There is therefore a complex relationship between inflation, Deflation_(economics)deflation, the money supply, and debt. The store of value represented by the entire economy of the industrialized nation itself, and the state's ability to levy tax on it, acts to the foreign holder of debt as a guarantee of repayment, since industrial goods are in high demand in many places worldwide.

Inflation indexed debt - Borrowing and repayment arrangements linked to inflation-indexed units of account are possible and are used in some countries. For example, the US government issues two types of inflation-indexed bonds, Treasury Inflation-Protected Securities (TIPS) and I-bonds. These are one of the safest forms of investment available, since the only major source of risk — that of inflation — is eliminated. A number of other governments issue similar bonds, and some did so for many years before the US government.In countries with consistently high inflation, ordinary borrowings at banks may be inflation indexed also.

Debt ratings, risk and cancellation -

Risk free interest rate - ''Main article: risk-free interest rate''Lendings to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate". This is because the debt and interest are highly unlikely to be defaulted. A textbook example of such risk-free interest is a Treasury securityUS Treasury security - it yields you the minimum return available in economics, but you get the security of the knowledge that the US has never defaulted on its debt instruments. A risk-free rate is commonly used in setting floating interest rates, floating interest rate is usually calculated as risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor. However if the real value of a currency has changed in the meantime, the purchasing power of the money repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical investment point of view, there is still considerable risk attached to "risk free" or "low risk" lendings. The real value of the money may have changed due to inflation, or, in the case of a foreign investment, due to exchange rate fluctuations.The Bank for International Settlements is an organisation of central banks that sets rules to define how much capital banks have to hold against the loans they give out.

Ratings and creditworthiness - Debt of countries as well as private corporations is rated by rating agencyrating agencies, such as Moody's, A.M. Best and Standard & Poor's. These agencies assess the ability of the debtor to honor his obligations and accordingly give him a credit rating. Moody's for example uses the letters ''Aaa Aa A Baa Ba B Caa Ca C'', where ratings ''Aa-Caa'' are qualified by numbers 1-3. Munich Re, for example, currently is rated ''Aa3'' (as of 2004). S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. 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 bondsjunk- or high risk bonds. Their high risk of default 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.

Cancellation - Short of bankruptcy, very often debts are wholly or partially forgiven. Traditions in some cultures demand that this be done on a regular (often annual) basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment.International Third World debt has reached the scale that many list of economistseconomists are convinced that debt cancellation is the only way to restore global equity in relations with the developing nations.

Effects of debt - Debt allows people and organisations to do things that they otherwise wouldn't be able or allowed to. Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their private equity. This leverage (business)leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the higher more debt per equity, the riskier.Debt as a whole is a sign of optimism, a society believes in its future (earnings especially), and of lack of work ethic, a society postpones the solution to present problems (when it compensates a fall in revenues, perceived as short term, by an increase in debt for instance)Excesses in debt accumulation have been blamed for exacerbating economic problems. For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess in debt, equivalent to excessive expectations on future returns, accompanied asset bubbles (stock market). When expectations corrected, deflation and credit crunch followed. Deflation_(economics)deflation effectively made debt more expansive and as Fisher explained this reinforced deflation agin. In order to reduce their debt level, economic agents reduced their consumption and investetment. The reduction in demand reduced business activity and caused further unemployment. Also in a direct sense, more Bankruptcybankruptcies occurred due to increased debt cost caused by deflation, and the reduced demand. It is possible for some organisations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the lender hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.See: Perils of the debt-propelled economy by Henry C K !Liuhttp://www.atimes.com/atime s/Global_Economy/DI14Dj01.html

Arguments against debt - ''Main article: Criticism of debt''Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Economics criticism focuses on debt fostering inequality. Muslim religion forbids lending with interest, the catholic church long did, and the torah wrote that all debts had to be erased every 7 years and every 50 years. Debt from a religious view point is condemned because by tying past and future it cuts from the present where God is to be found. Feminism concentrates on the perceived coercioncoercive nature of debt contracts. Environmental critics point out the disparity between material use of Natural resourcesresources from economic growth and the limited resources of natural production. Examples would be the low ecological yield of natural resources and the limited usable current solar incomeenergy from the sun.

Levels and flows - ''Main article: debt levels and flows''Global debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004.

See also -

Bond (finance)

Credit

Credit repair

Debt consolidation

Default (finance)

Derivative (finance)

Domestic debt

External debt (foreign debt)

Financial markets

Global debt

Government debt (public debt)

Interest

List of finance topics

On the Genealogy of Morals - Interestingly enough, in his second essay, Nietzsche ascribes concepts of guilt/''shuld'' to debt itself and the creditor/debtor relationship.

Personal debt (household debt)

Triple deficit

Thomson Financial league tables

Time value of money

Usury

External links -

oecd.org - OECD country debtCategory:Credit Category:Core issues in !ethicsca:Deutede:Schuldeneo:Sx uldoes:Deudaja:負債 ;pl:Dług? (ekonomia)

American Credit Counseling Service, Inc.
Non-profit community service organization dedicated to providing financial education, budgeting and debt management programs to consumers.
http://www.accs.org/

Financial Freedom Inspiration
Inspirational site on personal financial planning, starting a business and exiting the rat race
http://www.financial-freedom-inspiration.com/

Directory of Collection Agencies in the U.S.
A comprehensive directory of collection agencies from all parts of the U.S.A.
http://www.collection-agencies-usa.com

MEDCLR, Inc. - The Trusted Leader in Medical Debt Solutions.
MEDCLR, America’s most trusted purchaser of medical debt, turns non-performing debt into immediate cash. We’re the largest and most experienced medical debt buyer in the industry. More importantly, we handle your accounts professionally and with the same dedication to customer excellence that’s exhibited by your healthcare facility every day. Our collections agents are specifically trained to work within regulated medical services industries. We’ve bought billions of dollars in medical debt. We have millions of accounts and thousands of medical facilities from whom we buy. Discover what MEDCLR can do for you.
http://www.medclr.com/

FBP and Associates
FBP and Associates create opportunities for you to secure your financial future with people, through investment in residential real estate, home ownership, capital gain joint ventures, and independent i-Commerce business ownership!
http://fbpandassociates.com.au/home.html

Repair Your Bad Credit
An excellent resource for credit repair information.
http://www.goodcreditahead.com/

The UK Insolvency Helpline
Free Non Profit UK national debt advice organisation funded by the credit industry. Freephone 0800 074 6918
http://www.insolvencyhelpline.co.uk

DMCC 501c(3) Not-for-profit Debt Management
We are a non profit debt consolidation and credit counseling organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.
http://www.dmcccorp.org/

Sharelockholmes
UK Stock and Share Screener - Company Fundamentals including Financial History, Cash Flow, Profit, Dividend Yield, PER, EPS Growth, Net Asset Value, PSR, PBV and Gearing.
http://www.sharelockholmes.com/

Debt Financing, Mezzanine Financing, and Equity Capital
Commercial Funding International, LLC is a private, boutique real estate consulting and investment firm that provides comprehensive problem-solving concepts and results for commercial real estate transactions. Our focus is the effective utilization and leverage of human resources capital and monetary capital to create and increase real estate asset value. Our specialty is working on transactions that require “outside the box” funding assistance in the form of senior debt financing, mezzanine financing, participating debt, subordinated debt, equity, joint ventures, and credit and/or balance sheet enhancement. Clients may come to us because of the short time that is needed to close/fund, a need for equity capital, debt restructuring, or the size, location, or property type makes the transaction a non-traditional bank deal.
http://www.commercialfundinginternational.com/

InoVision - The After Collection Solution For Bad Debt - TM
InoVision buys utility bad debt portfolios, giving you immediate cash to improve your bottom line.
http://www.inovisioninc.com/

United States - Bureau of the Public Debt
Consumer site with basic debt information and an online bond-transaction page.
http://www.publicdebt.treas.gov/