Understanding Debt Securities: How Are These Financial Assets Beneficial for Investors?

Debt securities refer to financial assets that are bought or sold between two parties with basic terms defined. These financial instruments hold a promise from the issuer to pay the holder a specified amount at a particular date, which is when the debt security matures. They are negotiable assets which means their ownership can be transferred from one party to another easily. Government bonds, certificate of deposit, mortgage-backed securities, preferred stock, and municipal bonds are some of the popular examples of debt securities.   

How does debt security work? 

Debt securities are created when one party lends money to another. For instance, corporate bonds are types of financial instruments that are issued by corporations and sold to investors. Mostly investors return money to the organizations in return for a pre-established number of interest payments along with the return of their principal upon the bond’s maturity. Similarly, government bonds are issued by government bodies, which are sold to investors in return for interest payments and the bond’s maturity. These financial assets are known as fixed-income securities as they provide a fixed stream of income for their interest payments. In other financial instruments such as equity investments, the return earned by the investor completely relies on the market performance. However, debt securities ensure that investors receive payments of their principal amount along with a predetermined stream of interest payments.  

A look into the features of debt securities 

Various notable features of such financial instruments are there that investors must pay attention to. Debt securities include coupon rates that issuers need to pay. These coupon rates are fixed throughout the life of the security, or they vary depending on the inflation of the economy. In addition, these securities involve issue date which means the date at which the debt security was first issued. Further, the maturity date is the key feature of these financial assets, on which issuers need to repay the principal amount and remaining interest. It holds great importance in debt securities as the term length defines the price, interest rates, and benefits investors look for, such as higher returns with longer investments. In addition, yield-to-maturity is another aspect of these financial assets. It refers to the rate of return that investors expect to receive if the debt is stretched to maturity.  

Impairment of debt securities 

Impairment is a reduction in the value of an asset due to a decrease in its quantity, quality, or market value. Basically, it is an intricate accounting concept that means investors are accountable for any impairment losses on their companies’ profit or loss accounts. They usually compare the recoverable value of the asset with their book value before writing that amount as a loss. Therefore, the impairment of debt securities refers to the scenarios where the fair value of debt security is less than its amortized cost basis.  

Are debt securities a beneficial investment? 

Many benefits are associated with these financial assets. Basically, they are designed to provide investors with repayment of their initial capital investment. These fixed-income streams are an attractive alternative for investors who prefer a steady cash flow, especially after retirement or during uncertain economic conditions. Moreover, they are considered safer than equities, offering a higher degree of security compared to stocks due to their priority in claims during bankruptcy. In addition, these financial instruments offer extensive portfolio diversification by effectively reducing overall risk and stabilizing returns during market volatility. They act as a shield against the fluctuations of equity markets, providing a balance that enhances the overall performance of an investment strategy. 

Risks associated with debt securities  

Though debt securities are less volatile than stocks, they still possess some risks. As the borrower is legally required to make these payments, debt securities are considered to be a less risky form of investment compared to other equity investments such as stocks. For instance, a company with a strong balance sheet operating in a mature marketplace is less likely to become a defaulter than a startup company functioning in an evolving marketplace. Moreover, companies with higher credit ratings usually offer lower interest rates on their debt securities while keeping with the general tradeoff between risk and return.  

What is the main difference between debt securities and equity securities? 

Mainly, equity security represents a claim on the earnings and assets of a corporation, however, debt securities are the loans given by investors. For instance, stock is an equity security, however, bond is a debt security. When investors purchase a corporate bond, they are essentially loaning the corporation money and have the right to repay the principal & interest on the bond. On the other hand, when someone buys stock from a corporation, they essentially buy a piece of the company. However, if the company gains profits, the investor receives profits as well. At the same time if the company loses money, the stock also loses money. Such promising benefits of these financial assets are expected to boost the growth of the debt security market in the coming years. According to Allied Market Research, the industry is anticipated to rise at a CAGR of 7.8% from 2023 to 2032. 

SEBI’s new liquidity window facility 

In October 2024, the Securities and Exchange Bureau of India (SEBI) launched a new facility that is designed to enhance liquidity for investors in debt securities. The initiative allows investors to sell their bonds back to the issuer before the maturity date, improving the liquidity and flexibility of corporate bonds. SEBI aims to create a more dynamic and investor-friendly corporate bond market by offering a clear and standardized framework for implementing this facility.  

Key features of the new facility 

The liquidity window facility is an optional feature that debt security issuers choose to offer at the time of issuance. This flexibility enables issuers to tailor the facility to their specific needs and market conditions. The facility is designed to be available for all investors or retail investors to hold their debt securities in dematerialized form. Moreover, issuers have the flexibility to set a maximum limit for the total amount of debt securities that are redeemed through the liquidity window. This limit is set at 10% or more of the total issue size. In addition, issuers impose sub-limits for each liquidity window session to manage redemption flows effectively. Furthermore, issuers are able to maintain transparency by disclosing detailed information through the liquidity window, including the schedule, redemption activities, and outstanding amounts. Moreover, issuers designate a specific stock exchange to operate the liquidity window. This exchange is responsible for facilitating the redemption process and ensuring transparency. The new facility is typically open for three working days on a monthly or quarterly basis.  

Who is expected to benefit from this facility? 

This facility is especially beneficial for retail investors who do not have easy access to secondary markets for selling their debt securities. It offers a guaranteed exit option, improving liquidity and minimizing investment risks. Moreover, institutional investors have more flexibility in managing their portfolios, this facility is useful for tactical portfolio adjustments to meet specific liquidity needs. In addition, brokers and dealers benefit from this facility, enabling them to adapt their systems and processes to facilitate the trading and settlement of debt securities under the modern liquidity window framework.  

Final words 

Debt securities are profitable financial instruments that investors mainly purchase to get significant returns. They offer a safer option for investors to make investments and offer them greater flexibility to diversify their portfolios. Moreover, the rise in integration of modern technologies such as blockchain, electronic trading, and algorithm trading is expected to increase the liquidity of the industry in the coming period.   

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Business Credit Card Emerging as an Essential Financial Tool for the Corporate Sector

Business credit cards are corporate payment solutions that offer quick, short-term credit facilities intended particularly for businesses rather than personal use. These cards help employees by providing temporary fundings and managing expenditure. Limited grace period is given to the cardholder to repay the balance spent to the issuer. Two common categories of business credit cards are corporate business cards and small business cards. Corporate business cards are issued to established giants, whereas small business cards are offered to start-ups.

What Makes Business Credit Cards Important for Companies?

According to Allied Market Research, the business credit cards industry is expected to witness a revenue rise of $59.9 billion by 2032 from $33.5 billion in 2023, registering a CAGR of 7% from 2024 to 2032. The revenue growth is majorly driven by rapid expansion of small- and medium-sized businesses. This is attributed to the fact that small businesses face challenges in procuring traditional loans, which makes business credit cards a suitable financing option. As a result, small- and medium-sized businesses are expected to be the primary users of these cards. According to a recent study published by Forbes, one of the leading business magazines, approximately 67% of small and medium business companies use business credit cards as their primary financial tool for managing expenses. Effective credit utilization not only helps to build a strong business credit profile but also aids in easy loan approvals. Thus, they serve as a crucial payment tool for small- and mid-sized enterprises to manage and track cash flow and improve creditworthiness.

In addition, business credits cards are witnessing high adoption as they mitigate the risk of frauds in business transactions. The Association for Financial Professionals claimed that about 47% of the businesses faced check frauds in 2023. Remote deposit capture fraud, which involves repeated submission of the same check, was registered as the most prominent crime. Furthermore, identity theft associated with fraud checks accounted for approximately $1.3 billion loss in banks and credit unions. This alarming increase in fraudulent activities has boosted the demand for business credit cards, as they offer fraud protection features, which reduce cyber threats and illegal spending. In addition, these credit cards are integrated with advanced security features such as AI-driven fraud detection, virtual card numbers for online transactions, and real-time alerts. Moreover, to enhance security, financial institutions should regularly organize employee training and account holder education to detect forged signs and unusual check activities.

In addition , government organizations are implementing stringent regulations to minimize frauds. For example, new regulations have been passed to strengthen KYC protocols and enhance security measures for skeptical activities by the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau. Increase in such initiatives and measures from government and financial institutions are collectively enhancing financial security.

Co-operative Bank of Kenya Joined Hands with Visa to Introduce Innovative Business Cards

Co-operative Bank of Kenya signed a partnership with Visa, a leader in digital payments, to introduce multiple innovative cards for small- and medium-sized businesses. These include credit cards, pre-paid business cards, and debit cards to manage cash flow of enterprises. These cards also enable people to make direct payments from business accounts, offer interest-free credit access, and help track travel and office expenses. To further drive digitization, Co-operative Bank of Kenya invested about $38 million in 2023.

To Sum up

With rapid digitization coupled with the rising cases of cyber threats, the need for business credit cards is increasing. Moreover, the expansion of small- and medium-sized enterprises significantly drives the use of credit cards, as businesses rely on them to manage cash flow efficiently. In addition, governments across the world are implementing stringent policies to enhance security measures in financial institutions to reduce fraudulent activities. This, in turn, is expected to considerably augment the demand for these cards in the coming years.

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Insurance in the Digital World

Insurance is a legal contract that makes an individual eligible to receive financial compensation for the events covered under the agreement. This agreement is made between an insurance company, known as the insurer, and an individual, referred to as the insured. Individuals are required to pay a specific amount, called premium, to receive indemnities against losses.  

An insurance policy can be purchased for life, health, property, travel, or automobiles. Moreover, people also get insurance for specific needs like business shutdowns, wedding cancellations, identity theft, and kidnap or extortion. 

Working Principle of Insurance Policies 

All the insurance companies operate on the concept of risk pooling. They receive premiums at regular intervals from all their clients and pool the money to pay for the insured events when required. However, clients need to make their claims within the specific period policy to receive all the benefits.  

Any insurance policy comprises three major components: the premium, the policy limit, and the deductible. A premium is the monthly cost the insured pays to receive the benefits when required. A policy limit is the ultimate amount to be paid by the insurer for the covered loss. Whereas a deductible is a specific amount that the insured needs to pay before the insurer reimburses the remaining bill. Higher deductibles mean lower premiums, and lower deductibles mean higher premiums. 

E-insurance: Enhancing Convenience 

Digital shift through e-insurance is modifying the way people manage their different insurance policies. Replacing the traditional paper-based system, e-insurance allows the insured to access different plans through one account, regardless of the provider. In this system, every individual receives a unique e-insurance account (eIA) identifier that links different policies into one streamlined network. Moreover, digital record-keeping prevents the hassle of conserving important documents and eliminates the threat of misplacement. In addition, purchasing new policies through eIA identifier is easier since you don’t have to submit personal details and identity proofs repeatedly. 

Evolving Roles of AI in Insurance 

What began as experimentation, the integration of AI algorithms into insurance business models has become a strategic action to drive efficiency, ensure focused delivery, and improve customer experience. The latest report by Allied Market Research states that digital technologies like AI and data analytics will significantly transform operations in the insurance market in the coming years. 

Insurance companies highly depend on data to provide optimized insurance plans to individuals. From risk assessment and premium rate calculation to settling claim payouts and upgrading customer outreach, insurance companies require data to make all the essential decisions. The AI algorithm adds significant value to these processes by analyzing bulk amounts of data in real time. It converts insurance companies from reactive to proactive by predicting risks, identifying upcoming trends, and customizing policies for clients. The varying activities where AI can be employed for faster operations include risk assessment, underwriting, claims processing, fraud detection, and customer engagement. 

Using AI technology is complex; however, it is important for insurance companies to adopt the capabilities of AI and increase their workflow efficiency. In fact, in a June 2024 survey by the Deloitte Center of Financial Services, 76% of the 200 U.S. insurance executives confirmed the use of generative AI in one or more of their business functions. Furthermore, several insurance companies in Asia-Pacific are advancing their operations through AI implementation. The survey further discovered that companies were majorly adopting AI for distribution, risk management, and claims handling. 

In conclusion, insurance policies are important to safeguard lives and important assets against all possible uncertainties. Individuals must carefully assess their coverage requirements and invest wisely in the most suitable plan. Moreover, advanced features like e-insurance and AI make it easier for people to choose and manage policies based on their goals and finances. 

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Explore: Innovative Trends Revolutionizing the Embedded Finance Industry

Explore: Innovative Trends Revolutionizing the Embedded Finance Industry

key Takeaways:

· Introduction: Embedded finance is reshaping financial services

· Innovative trends in embedded finance

· Key developments of the embedded finance industry

The embedded finance sector is changing the way financial services are provided by seamlessly integrating them into non-financial platforms. This innovative method enables companies to offer financial products and services to their customers without depending on traditional banking systems. Integrating finance into common transactions such as e-shopping, transportation services, or retail transactions allows businesses to provide a more personalized and convenient experience for their customers. It is expected that this change will expand as more sectors adopt embedded financial solutions to meet the evolving needs of consumers in the digital era.

What innovative trends are aiming to revolutionize the embedded finance sector?

Advancing embedded finance solutions

There has been a notable increase in the number of companies providing embedded finance solutions. Traditional financial institutions and fintech startups use APIs to integrate financial services into various platforms such as gig economy, e-commerce, and SaaS applications.

Expansion of the API economy

The growth in APIs has made it easier to integrate financial services into third-party platforms. This development has resulted in the formation of API outlets and platforms, enabling companies to conveniently combine lending, payment, insurance, and banking services into their products.

Enhancing the customer experience

With the integration of financial services into everyday applications, there is a focus on enhancing the customer experience. Embedded finance solutions aim to provide seamless financial experiences to users while they are engaged in their usual activities, such as making online payments or purchasing insurance through travel booking platforms.

Regulatory considerations

Regulatory frameworks are changing to adapt to the evolving environment of embedded finance, which is merging industries and creating new financial interactions. Regulatory authorities are establishing guidelines and standards to address the risks and challenges related to data security, consumer protection, and compliance with embedded financial solutions.

Rise of embedded insurance

Embedded insurance has gained traction as a key aspect of embedded finance, in addition to payments and loans. Companies that are not part of the insurance sector are integrating insurance products and services into their platforms to enrich their value propositions. This strategy helps in building customer loyalty, and it also generates extra revenue streams.

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Innovation in financial infrastructure

The evolution of embedded finance is driving innovation in financial infrastructure, leading to advancements in digital identity verification, real-time payments, blockchain technology, and open banking initiatives. These advancements are enhancing the security, efficiency, and transparency of financial transactions in embedded finance ecosystems.

What are the key developments in the embedded finance sector that businesses need to be informed about?

Some companies, such as Walnut Insurance Inc., Stripe, Inc., Finastra, and Fortis Payment Systems, LLC, are focusing on improving their offerings and expanding their geographical reach in various regions. In addition, these industry players aim to introduce new products and technologies to ensure higher customer satisfaction. They are also engaging in partnerships and joint ventures to maintain a competitive edge. For instance, in June 2023, Stripe collaborated with Google Workforce to allow customers to schedule appointments, make bookings, and complete payments through Google Calendar.

On the other hand, in June 2023, Finastra partnered with ADVANTAQ, a top compliance technology partner, to improve operational efficiencies and offer a more streamlined experience for vendors.

Furthermore, in November 2022, SBM Bank India and Open Financial Technologies Pvt. Ltd. formed a strategic partnership to launch Zwitch, a holistic embedded finance platform. Zwitch offers fintech, a user-friendly and flexible API solution, enabling them to easily create customized financial products using both no-code and low-code techniques.

To sum it up, the global embedded finance industry is transforming the financial services landscape by seamlessly integrating services into non-financial platforms. With technological advancements, regulatory adaptations, strategic partnerships, and enhanced customer experiences, this sector is expected to provide profitable growth opportunities in the digital era.

To gain insights into the technological developments offered by key market players in the embedded finance industry, feel free to reach out to our experts here!

Short Description:

Embedded finance integrates financial services with non-financial platforms to change how services are accessed and improve customer experiences. Innovative trends encompass API integration, embedded insurance, infrastructure advancements, strategic partnerships, and technological improvements. This developing sector offers lucrative growth opportunities in the coming years. 

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Author’s Bio: — Harshada Dive is a computer engineer who loves to experiment with trending topics and is passionate about presenting these topics creatively to her audience. When Harshada’s not writing, she is either gardening or listening to inspirational podcasts.