Large organizations can issue debt in the form of 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.
Securitization
Securitization 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.
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, 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.
In countries with consistently high inflation, ordinary borrowings at banks may be inflation indexed also.
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 US 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.
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- 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 on his debt. These types of debt are frequently repackaged and sold below face value.
International Third World debt has reached the scale that many economists are convinced that debt cancellation is the only way to restore global equity in relations with the developing nations.
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 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 bankruptcies 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 Liu /atimes/Global_Economy/DI14Dj01.html
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 coercive nature of debt contracts. Environmental critics point out the disparity between material use of resources from Economic growth and the limited resources of natural production. Examples would be the low Ecological yield of natural resources and the limited usable energy from the sun.
Global debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004.