Debt

Debt is an obligation by one party to another to repay borrowed value, typically with interest, according to agreed terms. It arises from contracts such as loans, bonds, or credit arrangements and is recorded as a liability on the borrower’s balance sheet. The borrower pays set interest and repays principal over time, or in a single lump sum at maturity.

Debt can be secured or unsecured. Secured debt is backed by collateral; unsecured debt relies on the borrower’s creditworthiness. It can be fixed-rate, where interest remains constant, or floating, tied to a benchmark. Debt instruments include bank loans, corporate bonds, government bonds, and consumer credit such as mortgages and credit cards.

Economically, debt serves to finance investment and consumption beyond current income, enabling growth but transferring financial risk to lenders. It creates leverage: if returns exceed borrowing costs, wealth can rise; if not, debt can jeopardize repayment. Efficient markets allocate risk and price credit through interest rates.

Debt is managed through planning, refinancing, or restructuring. In the public sector, debt sustainability is evaluated by metrics such as debt-to-GDP and debt service relative to revenue. Governments may impose ceilings or pursue austerity or stimulus as conditions for lenders.

In the corporate sector, debt is used to fund operations, with covenants and credit ratings influencing borrowing terms. In households, debt affects credit scores, borrowing capacity, and financial resilience, and policy concerns include predatory lending and consumer protection.

Risks include default, refinancing risk, interest rate risk, currency risk, and systemic spillovers during crises. Outcomes range from workouts and bankruptcies to debt relief programs and restructurings, sometimes with external support from institutions such as the IMF or creditors' committees.

Debt markets have evolved over centuries, from ancient lending to modern markets for bonds and syndicated loans, with important roles in economic development and financial stability.