4. International borrowing and crediting

A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.

A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.

In finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.

Before a debt can be made, both the debtor and the creditor must agree on the manner in which the debt will be repaid, known as the standard of deferred payment. This payment is usually denominated as a sum of money in units of currency, but can sometimes be denominated in terms of goods or services. Payment can be made in increments over a period of time, or all at once at the end of the loan agreement.

A company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into:1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of the characteristics noted above.

A debt obligation is considered secured, if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company. Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims.

Private debt comprises bank-loan type obligations, whether senior or mezzanine. Public debt is a general definition covering all financial instruments that are freely tradable on a public exchange or over the counter, with few if any restrictions.

A basic loan or "term loan" is the simplest form of debt. It consists of an agreement to lend a fixed amount of money, called the principal sum or principal, for a fixed period of time, with this amount to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called bullet loans, particularly if there is only a single payment at the end – the "bullet" – without a "stream" of interest payments during the life of the loan. There are many conventions on how interest is calculated – see day count convention for some – while a standard convention is the annual percentage rate(APR), widely used and required by regulation in the United States and United Kingdom, though there are different forms of APR.

In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional principal has the same economic effect as a higher interest rate (see point), and is sometimes referred to as a banker's dozen, a play on "baker's dozen" – owe twelve (a dozen), receive a loan of eleven (a banker's dozen). Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($11–$10)/$10 = 10% interest; however, if one borrows $9 and must repay $10, then this is ($10–$9)/$9 = 11 1/9% interest.

Rather than the entire principal amount of the loan being due at the end of the loan, the principal may be slowly repaid or "amortized" over the course of the loan – see amortizing loan. This is particularly common in mortgages and in the minimum payment on credit cards.

A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.

A bond is a debt security issued by certain institutions such as companies and governments. A bond entitles the holder to repayment of the principal sum, plus interest. Bonds are issued to investors in a marketplace when an institution wishes to borrow money. Bonds have a fixed lifetime, usually a number of years; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity.

Credit (from Latin credo transl. "I believe" ) is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower.

Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the direct exchange of goods and services (Ingham 2004 p. 12-19). However, in modern societies credit is usually denominated by a unit of account. Unlike money, credit itself cannot act as a unit of account.

Movements of financial capital are normally dependent on either credit or equity transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets. The purest form is the credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk – the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

The word credit is used in commercial trade in the term "trade credit" to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

The list of used basic literature:

1. Oatley T. International Political Economy / Thomas Oatley. – fifth edition- Boston: Longman, 2012- 416 p.

2. Pugel T.A. International Economics: / Thomas A. Pugel – fifteenth edition – New York: McGraw-Hill, 2012 – 770 p.

3. King P. International Economics, Globalization and Policy: a reader / Philip King, Sharmila King - fifth edition - New York: McGraw-Hill, 2009 – 376 p.

4. Feenstra R.C. (2004), Advanced International Trade. Theory and Evidence, Princeton University Press.

5. James Rauch (2008). "growth and international trade," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.

6. M. June Flanders (2008). "international economics, history of," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.

7. Reuven Glick (2008). "macroeconomic effects of international trade" The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.

8. Smith, Charles (2007). International Trade and Globalisation, 3rd edition. Stocksfield: Anforme. ISBN 1-905504-10-1.

9. Stanley W. Black (2008). "international monetary institutions," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.

10. Paul R. Krugman International Economics: theory and policy: / Paul R. Krugman – seventh edition- Boston: 2006

11. Cr. W. Kegley American Foreign Policy: pattern and process / Cr. W. Kegley – 2009

12. Caves R.E. World Trade and Payments: an introduction / Caves R.E. – Boston, 2007