What are Debt Capital Markets?
Debt capital markets are markets that are established for buying and selling various types of debt securities. Businesses and governments make use of these markets to generate revenue by either selling or investing in the securities offered for sale on a debt capital market. Typically, the securities traded in this environment are considered long-term, in that the maturity date for the securities is more than one calendar year.
The overall capital market is composed of a union between debt capital markets and equity capital markets. This arrangement makes it possible to purchase debt securities such as bonds that are issued by companies or government agencies, as well as to offer those bonds for sale within a controlled environment. Most nations utilize some type of regulatory agency to monitor the activity that occurs within the markets, making sure all activities are within the scope of current laws and regulations. In the United Kingdom, this task is assigned to the Financial Services Authority or FSA. The Securities and Exchange Commission or SEC in the United States also oversees the function of debt capital markets as a means of protecting participants from fraud or other unlawful activities.
The use of debt capital markets to generate revenue for specific projects is very common. For example, a company may create and sell a bond issue that is structured to make interest payments to investors quarterly or semi-annually, with the total purchase price of the bond redeemed once the issue reaches maturity several years down the road. Alternatively, the issue may be structured to sell the bond at lower than face value, but allow the owner to redeem the bond at face value after the bond matures. In either scenario, the issuer has the use of the funds generated by the issue for the entire life of the bond, a move that allows the company or government to complete projects that ultimately begin to generate revenue on their own before the bond matures. This in turn supplies the funds to manage the bond redemption and leaves the issuer with a new source of income that is likely to remain viable for many years to come.
Debt capital markets also provide benefits to investors. Since the types of investments traded in these markets tend to be relatively low in terms of risk, investors are much more likely to generate some type of return. While that return may be somewhat modest in comparison to the potential of riskier ventures, investments in bond issues and similar debt capital instruments is often a good way to anchor a financial portfolio. This is because the debt capital instruments provide some stability that serves as the platform for taking on a few investments that are more volatile in nature. In addition, the rate of return on debt instruments traded in debt capital markets is higher than the interest earned on savings accounts and similar plans, making them more attractive in terms of a money-making investment.
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