DEBT

Debt is the obligation or promise that a person, entity or country makes to pay money to someone else. Financial debt is used when referring to the existence of a contract in which that one of the parties in the contract has the obligation to pay money in exchange of something.

Debt is defined by three parameters: the quantity to pay (or capital), the term until the payment date (or term), and the cost to dispose of that money during such time (or interest determined from the interest rate or price of money). He who has promised to pay is called debtor and he who has the right to collect is called creditor.

The creditor assumes risk in the transaction, which may be classified in different ways and are summarized as; market, credit, legal and operational risk. The interest rate, or cost of the debt, will be closely related to the information available at the time of the execution of the contract and the probability of the exchange to occur.

The higher the risk taken, the higher the cost of the debt which means the interest rate is higher. In companies, debt is noted in its accounting, both the loans conceded and received. Its identification in the financial and accounting information is shown in the balance sheet; loans conceded are part of the assets and those received are part of the liabilities. Interest incomes derived from the loans conceded and the expenses from the loans received are shown in the profit and loss account.

The comparison between the expense caused by financing the assets of the company and the profit gained for applying it to the company´s activity is called financial leverage.