Short answer: The debt market is a marketplace where fixed-income securities, such as bonds, are bought and sold. Governments and companies use it to borrow money, and lenders receive periodic interest and get their principal back when the loan ends.
Last reviewed: 12 November 2026
At a glance
| Term | What it means | Key point |
|---|---|---|
| Government securities | Debt issued by a government | Carry sovereign backing, so default risk is negligible |
| Corporate bonds | Debt issued by companies | Let companies raise capital without diluting equity, but carry default risk |
| Coupon | Periodic interest paid to the lender | Paid while the security is outstanding |
| Principal | The amount originally lent | Returned to the lender at maturity |
| Yield | The return investors demand for lending | Rises when perceived default risk rises |
| Default risk | The chance the borrower fails to pay | Assessed by credit rating agencies |
How does the debt market work?
The debt market runs on a fixed-income model. In this model, an investor lends money for a set period, and the borrower repays it on agreed terms. The borrower that issues the security is called the issuer.
Each interest payment the issuer makes is called a coupon. The amount originally lent is the principal, and it comes back to the lender at maturity, the date the security ends. Between issue and maturity, the lender’s income is the coupon.
How is it different from the equity market?
In the equity market, investors receive ownership stakes in a company. A shareholder owns a slice of the business and shares in its fortunes.
A debt investor does not own any part of the issuer. The lender’s claim is a fixed set of payments: coupons along the way and principal at maturity. This is why debt is called fixed-income, while equity is not.
Why do companies issue bonds instead of shares?
A company that wants to raise capital can either sell shares or issue bonds. Selling new shares gives new owners a part of the company, which dilutes the ownership of existing shareholders. A bond does not give the lender any ownership, so existing owners keep their full stake.
The trade-off is the obligation to pay. A bond requires coupon payments and repayment of principal regardless of how the business performs. That fixed obligation is the main reason bonds carry default risk.
What are the main types of debt securities?
The two broad types are government securities and corporate bonds. Government securities are issued by the government and carry sovereign backing, meaning the government stands behind them. Because of this, they have negligible default risk.
Government securities also serve as the benchmark risk-free rate in the economy. This is the reference return against which other borrowing is priced. Corporate bonds are issued by companies. They let businesses borrow without diluting equity, but their returns are less certain, because the company may not be able to pay.
Why do corporate bonds carry more risk?
Default risk is the chance that an issuer fails to make its promised payments. Credit rating agencies assess this risk for issuers. A company with higher perceived default risk must offer a higher yield to attract lenders.
The catch is that a high yield is compensation for risk, not a guaranteed gain. If the issuer defaults, the investor may receive less than the coupons and principal promised.
What does a hypothetical example look like?
The figures below are invented for illustration and do not describe any real bond. Suppose a company issues a bond with a principal of ₹1,00,000 (one lakh), a coupon of 8 per cent a year, and a maturity of 3 years.
The yearly coupon is 8 per cent of ₹1,00,000, which is ₹8,000. Over three years the lender receives ₹24,000 in coupons. At maturity the lender also gets back the ₹1,00,000 principal, for a total of ₹1,24,000.
That total assumes the company pays every instalment in full. If it defaults before maturity, the lender may receive less. The same arithmetic applied to a ₹1 crore bond at 8 per cent would give a yearly coupon of ₹8 lakh, but the risk of non-payment still applies.
Frequently asked questions
Is a government security the same as a corporate bond?
No. Government securities carry sovereign backing and have negligible default risk. Corporate bonds carry default risk, so their returns are less certain.
What is a coupon?
A coupon is the periodic interest an issuer pays to the lender of a debt security. The principal is returned separately at maturity.
Why does a riskier issuer offer a higher yield?
Investors demand a higher yield when they perceive more default risk. Credit rating agencies assess that risk for each issuer.
Sources and last check
Facts in this article were checked against the sources below on 12 November 2026. Rules and figures can change; check the primary source before acting.
- upstox.com (broker education)
- dhan.co (broker education)
- groww.in (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.