Definition: A debt capital market (DCM) indicates a market in which companies and government can raise funding through the trade of debt securities, including corporate bond, government bonds, CDs, and so on.
What Does Debt Capital Market Mean?
What is the definition of debt capital market? Debt capital markets are responsible for assisting companies and governments with raising debt from a pool of investors who are seeking for funding opportunities. Raising debt is generally considered cheaper than raising equity. For instance, borrowing $100,000 at an annual interest rate of 6% costs $6,000. Raising equity for $100,000 would require giving up 20% of the company to the shareholders, i.e. a cost of $20,000.
Debt capital is usually long-term capital with relatively low rates, and it goes towards refinancing or restructuring existing debt or for a potential merger with another company. In the United States, DCMs are regulated by the U.S. Securities and Exchange Commission (SEC).
Let’s look at an example.
Example
Company ABC seeks to raise $100,000 in debt by issuing 20-year corporate bonds at an annual interest of 6.25%. The company issues the bonds, and the interested investors are purchasing the bonds in the capital market for $10,000 each, i.e. the bond’s par value. Unlike stockholders, bondholders do not gain voting rights in the firm’s core decisions or rights to the firm’s future earnings.
The company receives the par value of each bond with the obligation to compensate each investor with the par value plus the annual interest of 6.25% at maturity. In case a bondholder wants to sell the bond before maturity, he can do so in the DCMs.
DCMs are important because they determine the level of interest rates. High-interest rates lower the consumer borrowing and spending as well as the business investment. Conversely, when interest rates decline, consumer borrowing and spending tend to increase as consumers feel more confident about the economy.
Summary Definition
Define Debt Capital Markets: Debt capital market means an exchange where companies can sell debt to raise operating funds.
