Investment in debt securities can be risky but offers a stable income stream. These securities are usually sold by corporations and have fixed or variable interest rates. Investors will receive a payment of interest at least twice a year from the issuing corporation until the bond matures. Some bonds will also have a special call feature where the issuing corporation will purchase the bonds from the investor prior to maturity. The interest rate on these securities depends on the duration of the bond and the credit rating of the issuing corporation.
The risk associated with debt securities is lower than that of equity investments. But the actual risk depends on the characteristics of the security itself. An older organization, for example, will be less likely to default on its debts and will be better able to secure a favorable credit rating. This is why debt securities are considered safer investments.
Investing in debt securities can help diversify an investment portfolio. These securities can also help support social impact projects or New Zealand businesses. They also offer a higher level of certainty than shares. Some companies even offer newsletters that feature information about investment opportunities. If you are interested in learning more about investment in debt securities, consider subscribing to a service like Catalist.
Debt securities are traded, and the cash flows associated with them are recognized in earnings. The initial investment in a debt security is usually the present value of future cash flows. However, trading debt securities are not considered core operations and are reported in the operating activity account. As such, any changes in the fair value of the security are recorded in earnings.