What is debt?

Debt is an obligation, usually financial, owed by one person or organisation to another. It is calculated by taking the principle sum and applying the agreed interest rates over a period of time. It can take the form of payment due for goods and services, cash loans, credit card debt, overdrafts, mortgages, commercial paper or bonds. Households, businesses and governments all incur debt at one time or another.

Where have you heard about debt?

Talk of debt is everywhere, whether it's people discussing their personal borrowing or commentators holding forth on the latest figures for government borrowing. Investors will read disclosures of debt levels in the annual reports of the companies in which they invest.

What you need to know about debt.

Debt describes a requirement for one party to pay another the sum specified. Traditionally, the debt remained on the books of the lender – bank or finance company until it was paid off by the borrower. Today, a huge market has developed in trading debt, taking its cue from the long-established markets in government and high-grade corporate bonds. Mortgages, car loans, junk bonds, emerging-market debt and municipal bonds change hands in large quantities as traders gauge the default risk of each package of debt. Different borrowers have varying credit ratings.