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. Asset-Backed Commercial Paper - ...

    A short-term investment vehicle with a maturity that is typically ...
  5. Auction Rate Security - ARS

    A debt security that is sold through a dutch auction. The auction ...
  6. Structured Investment Vehicle - ...

    A pool of investment assets that attempts to profit from credit ...
Related Articles
  1. Why Hedge Funds Love Distressed Debt
    Mutual Funds & ETFs

    Why Hedge Funds Love Distressed Debt

  2. These Financial Products Are Too Complex ...
    Options & Futures

    These Financial Products Are Too Complex ...

  3. The Fuel That Fed The Subprime Meltdown
    Personal Finance

    The Fuel That Fed The Subprime Meltdown

  4. Auction Rate Securities: Bidding On ...
    Bonds & Fixed Income

    Auction Rate Securities: Bidding On ...

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center