An old adage says there are two kinds of investors: owners and loaners. Owners invest in equity securities, like stocks, while loaners invest in debt securities, like bonds. If you are a loaner, you can invest in either marketable or non-marketable debt securities. The difference between the two types of debt instruments involves whether the security can be bought and sold in the secondary market.
How Debt Instruments Work
Businesses and governments need money to operate. If they don't have enough operating capital, they might borrow money from investors by issuing debt instruments. These instruments work on the same basic principal as your savings account at your local bank. You invest money with the lender, commonly referred to as the issuer, in exchange for regular interest payments and a promise to return the face amount of the loan upon maturity at a future date.
Marketable debt includes negotiable financial instruments or securities that are transferable and can be bought and sold on the secondary market, according to TreasuryDirect.com. Marketable debt includes corporate bonds, municipal bonds, U.S. government bonds, bills and notes, and high grade commercial paper. Marketable debt can be an extremely safe or an extremely risky investment, depending on the creditworthiness of the issuer. The price of marketable debt fluctuates in response to market conditions and is particularly sensitive to changes in prevailing interest rates.
Non-marketable debt includes financial securities and instruments that are not transferable and cannot be bought or sold in the secondary market. Examples of non-marketable debt are U.S. savings bonds and most bank certificates of deposit. While you might be able to cash in your savings bonds with the U.S. Treasury Department, or withdraw your funds from your certificate of deposit at your bank, you cannot sell these instruments to a third party.
Non-marketable debt instruments typically have a fixed rate of return, and you can predict how much they will be worth at any given point in time, although there may be a penalty for early redemption. Marketable debt instruments can be redeemed for their full face value upon maturity and pay a fixed or variable rate of interest in the interim. The market price of these securities typically moves in the opposite direction of prevailing interest rates. The reason is simple. No one would invest $1,000 in a bond that pays 6 percent interest when they can invest $1,000 in a bond that pays 7 percent interest. The market price of the 6 percent interest bond has to drop to compete with the higher interest bond.
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