Debt

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. The debt may be owed by sovereign state or country, local government, company, or an individual. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.[1] Loans, bonds, notes, and mortgages are all types of debt. The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.[2] For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person.

The English term "debt" was first used in the late 13th century.[3] The term "debt" comes from "dette, from Old French dete, from Latin debitum "thing owed," neuter past participle of debere "to owe," originally, "keep something away from someone," from de- "away" (see de-) + habere "to have" (see habit (n.)). Restored spelling after c. 1400.[4] The related term "debtor" was first used in English also in the early 13th century; the terms "dettur, dettour, from Old French detour, from Latin debitor "a debter," from past participle stem of debere;...The -b- was restored in later French, and in English c. 1560-c. 1660." In the King James Bible, various spellings are used; the spellings "detter three times, debter three times, debtor twice and debtour once." [5]

Interest is the fee paid by the borrower to the lender. Interest is calculated as a percentage of the outstanding principal, which percentage is known as an interest rate, and is generally paid periodically at intervals, such as monthly or semi-annually.

Interest rates may be fixed or floating. In floating-rate structures, the rate of interest that the borrower pays during each time period is tied to a benchmark such as LIBOR or, in the case of inflation-indexed bonds, inflation.

There are many different conventions for calculating interest. Depending on the terms of the debt, compound interest may accumulate at a specific interval. In addition, different day count conventions exist, for example, sometimes each month is considered to have exactly thirty days, such that the interest payment due is the same in each calendar month. The annual percentage rate (APR) is a standardized way to calculate and compare interest rates on an annual basis. Quoting interest rates using APR is required by regulation for most loans to individuals in the United States and United Kingdom.

For some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid. This may be because upfront fees or points are charged, or because the loan has been structured to be sharia-compliant. The additional principal due at the end of the term has the same economic effect as a higher interest rate.

Riskier borrowers must generally pay higher rates of interest to compensate lenders for taking on the additional risk of default. Debt investors assess the risk of default prior to making a loan, for example through credit scores and corporate and sovereign ratings.

This page was last edited on 1 June 2018, at 08:07 (UTC).
Reference: https://en.wikipedia.org/wiki/Debt under CC BY-SA license.

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