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Debt capital markets (DCM) is a division of investment banking and a concept in corporate finance. As a concept, a debt capital market is a space for companies and governments to buy and sell debt as a way to raise capital or make a profit. DCM divisions of investment banking companies facilitate the creation and sale of debt securities for their clients.
In this guide, we’ll go over:
- Debt Capital Market Definition
- Key Terms to Understand DCM
- Types of Securities in DCM
- Debt Captial Markets vs. Equity Capital Markets
- DCM Careers and Skills
Debt Capital Market Definition
The debt capital market (DCM) is an exchange for debt securities. In other words, it’s a place where companies can sell debt —usually in the form of bonds —to investors to raise funds.
Selling debt may sound odd, but it’s akin to taking out a large-scale loan. The company gets an influx of cash. The investor, usually another company or government, earns interest on the investment, similarly to how a bank would when they extend things like mortgages or auto loans to customers. Debt securities are considered a low-risk investment, as the issuing company is expected to pay them back at a fixed interest rate and within a specified time period.
Key Terms for Understanding DCM
Bonds
A bond is a type of investment — an investor essentially loans a company money when they buy a bond. In return for loaning (or investing) that money, the buyer receives the promise of future repayment and a fixed rate of interest above their initial investment.
Companies, organizations, and governments issue bonds for other entities to buy so they can fund projects quickly. Issuing a bond puts the issuer in debt to a buyer — the money has to be paid back with interest. The bond comes with a contract that explains how much the bond is worth when it must be repaid, and how much interest will be charged.
Fixed-Income Markets
Debt capital markets are also called fixed-income markets because investors see a stable or fixed rate of return on their investment — an interest rate.
Interest Rates
An interest rate is a percentage of a loan, or lent money, that the borrower is required to pay back to the lender in addition to the original amount. Most bonds have a fixed interest rate, meaning it’s set when the bond is issued and does not change over the life of the bond. However, some debt securities have variable interest rates, meaning the interest rate can change based on an underlying metric, such as market conditions.
Primary Market
In the primary debt capital market, governments and companies issue bonds directly to the consumer, such as a company looking to secure debt funding.
Secondary Market
The secondary debt capital market involves the resale of already issued bonds for a higher or lower price, depending on the market.
>>LEARN MORE: Learn the fundamentals of debt with .
Types of Securities in DCM
Debt capital markets rely on the same premise as the investing world at-large — one entity (the issuer) offers a security for sale, and another entity (the buyer) purchases the security. The issuer profits from the sale of the security; the buyer gains capital to accomplish goals. The main difference is that the securities in DCM are bonds, rather than stocks or shares of a company.
Some common types of bonds bought and sold in debt capital markets are:
- Investment-grade bonds: Bonds that are low risk (likely to be repaid with interest)
- High-yield bonds: Bonds with high returns (high interest rates), but also often high-risk (less likely to be repaid with interest)
- Government bonds: Bonds issued by the government, also called Treasury bonds
- Emerging markets bonds: Bonds issued by the governments of developing countries, which typically have a high yield but greater risk of default than investment-grade or typical government bonds
>>MORE: Find out if investment banking is a good career path for you.
Debt Captial Markets vs. Equity Capital Markets
Debt is when the invested capital must be paid back with interest. Equity is when the invested capital is not paid back directly. Instead, the investor is hoping to see returns on their investment through company profits and success. Equity may also include voting rights in the company’s leadership. Both debt and equity are money for the company to use to accomplish its goals.
Both debt capital markets and equity capital markets exist as departments within investment banks where securities are bought and sold to raise capital. However, in equity markets, companies issue shares, or small pieces of ownership in the company, for investors to buy.
>>LEARN MORE: Explore more debt and equities concepts with .
DCM Careers and Skills
A career in a debt capital market group of an investment bank typically involves advising companies, governments, and institutions on the ways to raise money through debt. This type of career in finance requires pitching clients on new opportunities, either buying or issuing debt, facilitating these transactions, and researching trends.
Important skills needed for working in DCM, and for working in investment banking in general, include:
- Knowledge of investing concepts, like stock options
- Ability to work with a variety of financial models, such as discounted cash flow (DCF) valuation
- Analytical skills
- Understanding of how to calculate financial metrics, like compound annual growth rate (CAGR)
Start expanding your skills with Forage’s Investment Banking Skills Passport.
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Written by
McKayla Girardin→
Writer
Read more from McKayla Girardin
McKayla Girardin is a NYC-based writer with Forage. She is experienced at transforming complex concepts into easily digestible articles to help anyone better understand the world we live in.
As a seasoned expert in finance and investment banking, I bring forth a wealth of knowledge and practical experience to dissect the intricacies of Debt Capital Markets (DCM). Having actively engaged in the financial industry, I have firsthand experience in advising clients on capital-raising strategies, facilitating transactions, and staying abreast of market trends. My expertise is underscored by a comprehensive understanding of investment concepts, financial modeling, and analytical skills crucial in navigating the dynamic landscape of corporate finance.
Now, let's delve into the key concepts presented in the article:
Debt Capital Market Definition:
The Debt Capital Market (DCM) is a specialized division within investment banking, serving as an exchange for debt securities. These securities, typically in the form of bonds, provide a means for companies to raise capital by selling debt to investors. This process is analogous to taking out a loan, with the issuing entity obligated to repay the principal along with fixed interest over a specified period.
Key Terms for Understanding DCM:
-
Bonds:
- Definition: Bonds represent investments where an investor loans money to a company or government in exchange for future repayment and a fixed rate of interest.
- Purpose: Issued by entities to quickly fund projects, bonds come with a contractual agreement detailing repayment terms and interest rates.
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Fixed-Income Markets:
- Definition: Debt capital markets are often referred to as fixed-income markets due to the stable or fixed rate of return that investors receive on their investment, i.e., the interest rate.
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Interest Rates:
- Definition: A percentage of a loan that the borrower must pay back to the lender in addition to the original amount. Most bonds have fixed interest rates.
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Primary Market:
- Definition: The primary debt capital market involves the direct issuance of bonds by governments and companies to consumers or investors seeking debt funding.
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Secondary Market:
- Definition: The secondary debt capital market encompasses the resale of previously issued bonds at varying prices based on market conditions.
Types of Securities in DCM:
Debt capital markets operate on the fundamental premise of entities offering securities for sale, with bonds being the primary instruments. Some common types of bonds include:
- Investment-grade bonds: Low-risk bonds likely to be repaid with interest.
- High-yield bonds: High-return bonds with increased risk.
- Government bonds: Issued by governments, often referred to as Treasury bonds.
- Emerging markets bonds: Issued by developing countries, offering high yield but greater default risk.
Debt Capital Markets vs. Equity Capital Markets:
Debt and equity capital markets both exist within investment banks, but they differ in terms of repayment. Debt involves repaying the invested capital with interest, while equity entails returns through company profits and success.
DCM Careers and Skills:
A career in the debt capital market requires expertise in advising entities on debt-related financial strategies. Key skills include:
- Knowledge of investing concepts, such as stock options.
- Proficiency in financial modeling, including discounted cash flow (DCF) valuation.
- Analytical skills for researching trends and calculating financial metrics like compound annual growth rate (CAGR).
In conclusion, the Debt Capital Markets form a crucial facet of investment banking, providing avenues for companies and governments to strategically manage debt and raise capital. As an enthusiast in this domain, I encourage further exploration of these concepts for a comprehensive understanding of the financial landscape.
