Debt financing

Definition

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

1. Bonds are a common form of debt financing and can be issued by corporations, municipalities, and governments.
2. Interest expense from debt financing is tax-deductible, which can lower a company's taxable income.
3. Debt covenants are agreements between the borrower and lender that impose certain restrictions or requirements on the borrower.
4. Leverage ratios, such as the debt-to-equity ratio, are used to assess the risk associated with a company's level of debt financing.
5. Default risk is the risk that a borrower will be unable to meet their debt obligations.

Review Questions

Related terms

Bond: A fixed-income instrument representing a loan made by an investor to a borrower.

Interest Expense:

The cost incurred by an entity for borrowed funds.

Debt Covenant: A condition included in loan agreements that restricts certain activities of the borrower.