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A debt is an obligation owed by one party (the debtor) to a second party, the
creditor; usually this refers to assets granted by the creditor to the debtor,
but the term can also be used metaphorically to cover moral obligations and
other interactions not based on economic value.citation needed
A debt is
created when a creditor agrees to lend a sum of assets to a debtor. Debt is
usually granted with expected repayment; in modern society, in most cases, this
includes repayment of the original sum, plus interest.1
In finance, debt is a
means of using anticipated income and future purchasing power in the present
before it has actually been earned. Some companies and corporations use debt as
a part of their overall corporate finance strategy.
A syndicated loan is a
loan that is granted to companies that wish to borrow more money than any single
lender is prepared to risk in a single loan. A syndicated loan is provided by a
group of lenders and is structured, arranged, and administered by one or several
commercial banks or investment banks known as arrangers. Loan syndication is a
risk management tool that allows the lead banks underwriting the debt to reduce
their risk and free up lending capacity.
A bond is a debt security issued by
certain institutions such as companies and governments. A bond entitles the
holder to repayment of the principal sum, plus interest. Bonds are issued to
investors in a marketplace when an institution wishes to borrow money. Bonds
have a fixed lifetime, usually a number of years; with long-term bonds, lasting
over 30 years, being less common. At the end of the bond's life the money should
be repaid in full. Interest may be added to the end payment, or can be paid in
regular installments (known as coupons) during the life of the bond. Bonds may
be traded in the bond markets, and are widely used as relatively safe
investments in comparison to equity.
A letter of credit or LC can also be the
source of payment for a transaction, meaning that redeeming the letter of credit
will pay an exporter. Letters of credit are used primarily in international
trade transactions of significant value, for deals between a supplier in one
country and a customer in another. They are also used in the land development
process to ensure that approved public facilities (streets, sidewalks,
stormwater ponds, etc.) will be built. The parties to a letter of credit are
usually a beneficiary who is to receive the money, the issuing bank of whom the
applicant is a client, and the advising bank of whom the beneficiary is a
client. Almost all letters of credit are irrevocable, i.e., cannot be amended or
canceled without prior agreement of the beneficiary, the issuing bank and the
confirming bank, if any. In executing a transaction, letters of credit
incorporate functions common to giros and Traveler's cheques. Typically, the
documents a beneficiary has to present in order to receive payment include a
commercial invoice, bill of lading, and a document proving the shipment was
insured against loss or damage in transit. However, the list and form of
documents is open to imagination and negotiation and might contain requirements
to present documents issued by a neutral third party evidencing the quality of
the goods shipped, or their place of origin.
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