Get to Know - Debt Instrument

What is a Debt Instrument?

Debt Instrument is a kind of financial instrument in which one party has committed oneself as a debtor (borrower or so-called the ‘Issuer’) who obliges to pay cash flow (such as interest and value at maturity) to the creditor (lender or the debt instrument investor). Investment in debt instrument is one of the interesting investment alternatives for general investors. The cash flow that the investor shall gain from holding of debt instrument is the interest (called ‘Coupon’) on a regular basis according to the agreed upon period such as quarterly or annually at the rate pre-determined. Therefore, we may say that investor of debt instrument shall bear not so much risk compared to other investment alternatives which may not pay regular cash flow to the investors. Hence, Debt Instrument might be called a “Fixed Income Instrument” to reflect the features aforementioned.

A saving-investment

Debt Instrument is considered to be the financial instrument that possesses the feature suitable for investment especially for those investors who are sensitive on risk issue since the holding of debt instrument shall enable its investor to receive regular cash flow both in terms of amount and payment term which will facilitate the investors to do their own financial planning more easily.

Risk Diversification of Portfolio

Diversification of risk from investment in debt instrument is another advantage which the investor can enjoy since the direction of the price movement as well as the yield from debt instrument investment are not in the same direction with other alternatives investment, e.g. investment in ordinary shares. Thus, investors shall benefit from their own financial management in term of risk diversification which results in the more efficiency on portfolio management since the investors shall bear less risk while the yield on portfolios which also consists of debt instrument has not reduced much.

Higher priority Claim than Ordinary Share

Because the debt instrument investors are under creditor status of the issuer while the ordinary share holders are under owner status, in term of priority claim, creditors should have higher priority claim over the owner of the company in all respects. In normal operation of the company, its operating profit, no matter high or low, or even in the event of an operating loss, the issuer company has to pay interest to the creditors before paying dividend (which may or may not have any) to the owners. In addition, in the event of the company’s liquidation, the issuer company has to pay off the debts to the creditors in full from the money acquired from the selling of its assets first and only the remaining amount shall be averagely paid among the ordinary shareholders. Consequently, this proves that investment in debt instrument shall bear less risk than investment in ordinary shares in all respects.

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