ABSTRACT
In this chapter we examine loans and bonds, which together comprise debt capital, the second major class of external corporate financing. We commence with a review of why and how loans and bonds are used, the relative costs and benefits of borrowing through the debt markets, and the tradeoffs that exist between using too much and too little debt financing. We then consider the macro and micro forces that drive borrowing costs, and conclude by describing the characteristics of loans and bonds, and how they are created and traded. The concepts of debt financing covered in this chapter should be compared and contrasted with the equity financing material discussed in Chapter 4.
