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.

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.

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. Mutual Funds & ETFs

    Top 5 Precious Metals Mutual Funds

    Obtain information and analysis of some of the top-rated and most popular mutual funds that offer investors exposure to the precious metals industry.
  6. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  7. Professionals

    Are Hedge Fund ETFs Suitable for Your Portfolio?

    Are hedge fund ETFs right for you? Here's what investors need to consider.
  8. Mutual Funds & ETFs

    Currency-Hedged ETFs: Should You Invest?

    Currency-hedged ETFs offer many more pros than cons when compared to their counterparts, but there is still one big con.
  9. Professionals

    State Street Shifts to Hedge Funds

    ETF pioneer State Street has been losing market share to its peers. Here's how it plans to turn that around.
  10. Bonds & Fixed Income

    Brave Enough to Invest in Greek Bonds? Here's How

    Learn how an individual investor can invest in Greek government bonds, along with an overview of the substantial risks and potential profit.
RELATED FAQS
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  4. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  6. What are the top high yield bond ETFs?

    Three of the most popular high-yield bond exchange-traded funds, or ETFs, are the Peritus High Yield ETF (HYLD), the SPDR ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!