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Financing – Debt finance

1.3 Debt financing sources

Bank finance

For unquoted companies (any many quoted ones too), bank borrowing is the first
option for debt finance.

Traded debt/bonds

Quoted companies can issue bonds to investors in the stock market.

A bond has a specified nominal value (e.g. $100) and pays a fixed amount of
interest (the ‘coupon rate’ each year).

For example, an investor who buys a 6% coupon bond redeemable in 5 years
can expect (6% × $100 = ) $6 of interest each year for 5 years, and then a
repayment of $100 in 5 years.

The choice of whether to use bonds or bank borrowings is determined
by an assessment of:

 liquidity – bond markets are extremely liquid, with many potential
investors.

 timescale – generally speaking, bonds are used to finance long
term investments, whereas bank borrowings are more suitable for
short term needs.

 costs – entering the bond market might be rather difficult and
expensive, but once in, the costs reduce significantly.

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