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Types of Debt Securities

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A debt security is essentially an I.O.U. As an investor, you lend money to an issuer and the issuer, in turn, agrees to repay the loaned amount back to you at a later date with an amount of interest. Investing in debt securities is generally considered safer than investing in stocks.

There are several types of debt securities such as corporate bonds, municipal bonds, government agencies, and government securities. Government securities are backed by the full faith and credit of the US government. Municipal bonds are issued by local governments to fund public projects.

Along with the inherent benefits of buying bonds, it is important to understand the risks. Call risk is the risk that the bond will be bought back before the scheduled maturity date. Default risk is the potential that the issuer goes bankrupt and you lose your investment because the issuer cannot repay the original amount borrowed.