Debt financing involves raising capital through borrowing, typically by issuing bonds or taking out loans. It obligates the borrower to repay the principal amount along with interest over a specified period.
5 Must Know Facts For Your Next Test
Bonds are a common form of debt financing and can be issued by corporations, municipalities, and governments.
Interest expense from debt financing is tax-deductible, which can lower a company's taxable income.
Debt covenants are agreements between the borrower and lender that impose certain restrictions or requirements on the borrower.
Leverage ratios, such as the debt-to-equity ratio, are used to assess the risk associated with a company's level of debt financing.
Default risk is the risk that a borrower will be unable to meet their debt obligations.
Review Questions
What are the primary types of instruments used in debt financing?
How does interest expense from debt financing affect a company’s taxable income?
What is a leverage ratio and why is it important in assessing debt?
Related terms
Bond: A fixed-income instrument representing a loan made by an investor to a borrower.