Negotiable Debt Instruments
The two types of negotiable debt instruments are money and bond market. The distinction between the two is based on their maturities. Money market instruments are debt instruments such as certificates of deposit, commercial paper, government paper and bank loans, and have maturities of less than one year. Marketable debt instruments such as notes and bonds have maturities of longer than one year. An instrument is considered negotiable when it can be transferred from one legal owner to another either by endorsement or by delivery before it matures.
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Purpose
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Companies, governments, and institutions need capital for long-term investments for product lines, equipment, various assets and cash flow. The capital is provided by investors who purchase the organization's negotiable debt instruments. In this way the organization raises capital for its purposes and strives to increase its future value.
Features
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A borrower of negotiable debt instruments has a number of features to consider in the contract: the number of future interest payments, if the principal is to be repaid at maturity or amortized over the life of the contract, the type of security or collateral the lender will require as recourse, and the number of interest payments.
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Commercial Paper
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The appeal to a buyer of commercial paper is that the company issuing the paper agrees to pay the instrument on the maturity date with a guarantee. The buyer purchases the paper below its value and receives the full value upon maturity. Although there is a guarantee, it is only by the company itself and may not be as secure as a Treasury Bond. Because of the higher risk, the return may be stronger than other bank instruments.
Bonds
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Bonds are issued by governments, school boards and corporations. Buyers of bonds have the benefit of interest during the length of the term plus repayment of capital upon the maturity date. Maturity dates vary from one to 30 years. Bonds are negotiable on the secondary market. Bond prices fluctuate with interest rates: as the interest rate increases, it lowers the bond price; as it decreases it increases the bond price. In addition, there is price variation when the interest rate is low and the maturity date has a long term.
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