Esoteric Debt

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Structured Investment Vehicle - ...

    A pool of investment assets that attempts to profit from credit ...
  6. Asset-Backed Commercial Paper - ...

    A short-term investment vehicle with a maturity that is typically ...
Related Articles
  1. Mutual Funds & ETFs

    Why Hedge Funds Love Distressed Debt

    When hedge funds buy up bonds from bankrupt companies, should investors follow suit?
  2. Options & Futures

    These Financial Products Are Too Complex For The Average Joe

    Structured financial products are so elaborate that investors are unable to assess costs and risk.
  3. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  4. Bonds & Fixed Income

    Auction Rate Securities: Bidding On The Long Run

    These investments do better with a long-term horizon. Should you buy them before they're going, going, gone?
  5. Fundamental Analysis

    Why are OTC (over-the-counter) transactions controversial?

    Learn more about over-the-counter transactions, and why OTC traders are considered riskier than traders working with larger market exchanges.
  6. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.
  7. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  8. Mutual Funds & ETFs

    Can you invest in hedge funds?

    Read about what it takes to invest in a hedge fund, and learn how some investors find ways to indirectly capture a hedge fund's returns.
  9. Options & Futures

    Is short selling ethical?

    Understand the concept and practice of short selling, and examine the ethical questions that some investors raise in regard to this practice.
  10. Options & Futures

    How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock he or she doesn't technically own by borrowing on margin from a broker.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center