Esoteric Debt


DEFINITION of 'Esoteric Debt'

Complex debt instruments with structures and pricing that are known to relatively few participants. The structure may lead to seemingly attractive risk/return over other debt instruments when the instruments function properly, but can also lead to illiquidity and pricing problems when markets are disrupted. Auction rate securities are an example of an esoteric debt vehicle.

BREAKING DOWN 'Esoteric Debt'

Leading up to the Financial Crisis of 2008-2009, credit was flowing so freely that many companies were creating innovative and imaginative esoteric debt instruments to try to suit investor needs and make money. The result was many odd debt structures that fell apart when credit seized up and few people knew how they should be valued. While these complicated instruments may be more attractive than plain vanilla debt in good times, they can present immense problems when the credit markets tighten.

  1. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  2. Toxic Debt

    Debt that has a lower chance of being repaid with interest. Toxic ...
  3. Debt Security

    Any debt instrument that can be bought or sold between two parties ...
  4. Auction Rate Security - ARS

    A debt security that is sold through a dutch auction. The auction ...
  5. Asset-Backed Commercial Paper - ...

    A short-term investment vehicle with a maturity that is typically ...
  6. Structured Investment Vehicle - ...

    A pool of investment assets that attempts to profit from credit ...
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