What Is a Certificate of Debt?

Debt certificates are considered a safer investment than stocks.

A certificate of debt, also known as a bond, is a written promise issued by a government or company in order to raise money. It states the duration of the loan, the amount of principal and the fixed interest rate.

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Types

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Whether they are issued by companies, or by local or national governments, all bonds are classified by the length of time before maturity. Those maturing in less than a year are known as bills, those maturing in one to 10 years are notes and those with longer maturity are bonds.

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Companies issue debt when they need to raise money for new products or facilities. It is often cheaper than going to a bank and asking for a loan. For governments in need of funds, the alternatives are to raise taxes or go to international institutions such as the International Monetary Fund. Both are politically riskier options.

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Investing in Debt

Debt is considered a safe investment. Bond buyers, known as creditors, receive fixed income, which is why bonds particularly appeal to people approaching retirement. Unlike stockholders, creditors are not owners of a company and cannot claim a share of the profits. Because they involve less risk than stocks, bonds bring lower returns.

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