Debt instrument examples run from the Treasury bills the federal government auctions each week to the mortgage recorded at your county clerk’s office, with corporate bonds, municipal bonds, promissory notes, certificates of deposit, and credit cards all sitting somewhere in between. A debt instrument is any written contract that obligates one party to repay borrowed money under defined terms, and the category covers trillions of dollars of lending each year. The examples below are grouped by how they are issued and held: marketable securities that trade on public markets, private obligations held by the original lender, and specialized structures that behave differently from either.
What Every Debt Instrument Has in Common
Before the examples, four features show up in all of them.
Principal is the original amount advanced. Interest rate is what the borrower pays for the use of the money; on a bond, the stated rate at issuance is the coupon rate, while yield to maturity reflects the total annual return if the bond is bought at its current market price and held to the end. Maturity date is when the full principal is due, ranging from overnight on a repurchase agreement to 30 years on a long government bond. Repayment obligation is the legally enforceable promise that distinguishes a loan from a gift; if the borrower stops paying, the lender can foreclose on secured debt or pursue a court judgment and wage garnishment.
Lenders and brokers who pay at least $10 in interest during the year report that income to the IRS on Form 1099-INT.1Internal Revenue Service. About Form 1099-INT, Interest Income
Marketable Debt Securities
Marketable debt securities are standardized instruments issued by large entities and designed to trade on public exchanges after their initial sale. Standardization lets investors compare them easily and produces transparent pricing driven by prevailing rates and the issuer’s creditworthiness.
U.S. Treasury Securities
Treasuries are the benchmark for low-risk debt because they carry the full faith and credit of the federal government. They come in three main varieties by maturity: Treasury Bills run from four weeks up to 52 weeks, Treasury Notes mature in two to ten years, and Treasury Bonds carry terms of 20 or 30 years.2TreasuryDirect. About Treasury Marketable Securities Interest is taxable at the federal level but exempt from state and local income taxes under federal law.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation
Treasury Inflation-Protected Securities (TIPS) are a Treasury variant that adjusts its principal based on changes in the Consumer Price Index, so the payments keep pace with inflation.
Corporate Bonds
Companies issue corporate bonds to raise capital for operations, expansion, or acquisitions. A secured corporate bond is backed by specific collateral, such as real estate or equipment, giving the holder a claim on that property if the issuer defaults. An unsecured corporate bond, called a debenture, relies entirely on the company’s overall financial strength. In bankruptcy, secured creditors are paid from their collateral before unsecured creditors see anything, which is why debentures pay higher interest rates.
Municipal Bonds
State and local governments issue municipal bonds to fund public projects like schools, highways, and water systems. Interest on most municipal bonds is excluded from federal gross income,4Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds which makes them especially attractive to investors in high tax brackets.
Not every municipal bond qualifies for the full break. Private activity bonds, which finance projects with significant private use such as stadiums or airports, can trigger the alternative minimum tax; interest on specified private activity bonds is treated as a tax preference item under the AMT calculation.5Office of the Law Revision Counsel. 26 USC 57 – Items of Tax Preference Some municipalities also issue taxable bonds when federal rules restrict the tax-exempt option or when the issuer wants to reach pension funds and other tax-exempt institutional buyers.
Commercial Paper
Commercial paper is an unsecured, short-term IOU issued by large corporations with strong credit ratings, used to cover routine obligations like payroll and inventory. Under the Securities Act of 1933, notes with a maturity of nine months or less (roughly 270 days) are exempt from SEC registration, which is why commercial paper stays at or below that threshold.6GovInfo. Securities Act of 1933 The trade-off for the short maturity is a lower yield than longer-dated corporate bonds.
Private Debt Obligations
Private debt obligations are contracts held directly by the original lender rather than traded on public markets. They tend to be customized to the borrower’s situation and lack the standardized terms that make marketable securities easy to price and resell.
Promissory Notes
A promissory note is the simplest debt instrument: one party writes down a promise to pay a specific amount to another party, either on demand or by a set date. These show up constantly in seller-financed real estate, small business lending, and personal loans between family members. To be enforceable, the note needs to identify the principal, interest rate, and repayment schedule.
Most promissory notes include an acceleration clause, which lets the lender demand the entire remaining balance immediately if the borrower misses payments or breaches other terms. Without it, a lender would be stuck chasing each missed payment individually.
Term Loans
A term loan gives the borrower the entire amount upfront with a fixed repayment schedule. Business term loans often run three to ten years and carry covenants restricting the borrower’s financial decisions, such as maintaining minimum cash reserves or capping additional debt. Personal term loans, like auto loans, are usually secured by the purchased asset, so the lender can repossess the car if payments stop.
Mortgages
A mortgage is a term loan secured by real property. The mortgage document creates a lien on the home and gives the lender the right to foreclose and sell the property on default. That security lets lenders offer much lower rates than they would on unsecured debt of similar size.
Borrowers who put down less than 20% typically pay private mortgage insurance (PMI), which protects the lender if the borrower defaults. Under the Homeowners Protection Act, lenders must automatically cancel PMI once the loan’s principal balance is scheduled to reach 78% of the home’s original value based on the amortization schedule.7Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance If the borrower is behind on payments at that point, cancellation kicks in the first month after they become current.
Mortgage interest may be deductible on federal income taxes, subject to caps on the total loan balance that depend on when the mortgage was originated. IRS Publication 936 sets out the current rules, including how to calculate the deduction when only part of the interest qualifies.8Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
Certificates of Deposit
A certificate of deposit (CD) is a time deposit issued by a bank. The depositor lends money to the bank for a fixed term and earns a fixed interest rate, typically higher than a standard savings account. CDs held at FDIC-insured banks are protected up to $250,000 per depositor, per institution. They lack the market risk of bonds but penalize early withdrawals.
Revolving Credit
Lines of credit and credit cards work differently from every instrument above because they are revolving: the borrower can draw funds, repay them, and borrow again up to a set limit without taking out a new loan. A home equity line of credit (HELOC) is a common example, secured by the borrower’s home. Revolving credit has no fixed maturity date for the overall facility, though individual balances accrue interest from the draw date.
Specialized Debt Structures
Convertible Bonds
A convertible bond starts life as a regular corporate bond paying fixed interest, but gives the holder the option to swap it for a set number of the issuer’s common stock shares. The conversion price is locked in at issuance. If the stock rises above that price, the investor can convert and capture the equity upside; if it languishes, the investor keeps collecting bond interest and gets principal back at maturity. Because that option has real value, companies can issue convertibles at lower interest rates than straight debt.
Zero-Coupon Bonds
Zero-coupon bonds pay no periodic interest. They sell at a steep discount to face value, and the investor receives the full face value at maturity. Buy a zero-coupon bond for $600 that matures at $1,000 in ten years, and that $400 spread is the entire return. The IRS calls the spread original issue discount (OID).9eCFR. 26 CFR 1.1273-1 – Definition of OID
Even though no cash arrives until maturity, federal income tax is owed on the OID as it accrues each year. The tax code requires holders to include a portion of the discount in gross income annually.10Office of the Law Revision Counsel. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount That phantom-income feature makes zero-coupon bonds a better fit for tax-advantaged accounts like IRAs than for taxable brokerage accounts. Small personal loans between individuals under $10,000 are exempt from OID reporting, as are tax-exempt bonds and U.S. savings bonds.
Repurchase Agreements
A repurchase agreement (repo) is a short-term borrowing mechanism used mainly by securities dealers and financial institutions. The dealer sells government securities to an investor, often overnight, and simultaneously agrees to buy them back at a slightly higher price the next day. That price difference is effectively the interest on a very short, very secure loan. Repos provide the daily liquidity that keeps bond markets functioning.
Risks That Attach to These Examples
Debt instruments are often called “fixed income” because their payment schedules are predetermined. That predictability is their main selling point and the source of their main vulnerabilities.
Interest rate risk. Bond prices and interest rates move in opposite directions. When rates rise, existing bonds with lower coupons become less attractive and their market price falls. The longer the remaining maturity, the sharper the drop; duration measures how sensitive a bond’s price is to rate changes. A bond with a duration of seven years will lose roughly 7% of its market value for every one-percentage-point rise in rates, and the math works the same way in reverse when rates fall.
Inflation risk. A bond paying 4% annually loses ground when inflation runs at 5%, because the dollars coming in buy less than the dollars that went out. Long-term fixed-rate instruments are hit hardest. TIPS exist specifically to address this problem.
Credit risk. This is the possibility that the issuer cannot make interest payments or repay principal. Rating agencies such as Moody’s, S&P, and Fitch assess it with letter grades. Bonds rated BBB (S&P and Fitch) or Baa (Moody’s) and above are considered investment grade, meaning a relatively low chance of default.11Investor.gov. Investment-grade Bond (or High-grade Bond) Anything below is high-yield or “junk” debt and pays a higher coupon to compensate. U.S. Treasuries carry essentially zero credit risk because the federal government can raise taxes or issue new debt to meet its obligations.
How the Income Is Taxed
Tax treatment depends on who issued the instrument, what type it is, and whether you hold it to maturity or sell early.
Most interest income is taxable as ordinary income in the year you receive or accrue it, and payments of $10 or more are reported on Form 1099-INT.1Internal Revenue Service. About Form 1099-INT, Interest Income Qualified municipal bond interest is excluded from federal gross income.4Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds Treasury interest falls in between: federally taxable, exempt from state and local tax.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation
OID on zero-coupon and other discount instruments accrues into gross income each year using a constant yield method based on the bond’s adjusted issue price and yield to maturity, even when no cash is paid.10Office of the Law Revision Counsel. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount
Holding a bond to maturity after buying it at face value produces no capital gain or loss. Selling on the secondary market does: the difference between adjusted cost basis and sale price is a capital gain or loss, short- or long-term depending on the holding period.