Saturday, April 18, 2009

matching savers and borrowers: Debt and Equity(1)

primary in which newly issued claims are sold to initial buyers by the borrower, are used by businesses to rise funds for new ventures and by governments to finance budget deficits.Borrowers can raise funds in a primary financial market in two ways, which result in different types of claims on the borrower,s future income.The first and most commonly used claim is debt,which requires the borrower to repay the amount borrowed,the (principal),plus a rental fee,or (interest).The other type of claim is equity,which is a claim to a share in the profits and assets of a firm. Let,s explore the main differences between these two ways of raising funds.
Debt instruments are promises to repay the principal and interest,all at once or in periodic payments over a fixed period of time.The length of the period of time before the debt instrument expires is its maturity,or term.
The maturity can be a short period of time (30 days or even overnight)or a long period of time (30 years or more).Short-term debt instruments have a maturity of less than one year. Intermediate-term debt instruments have a maturity of between one year and 10 years.Long-term debt instruments have a maturity of 10 years or more.Debt instruments include student loans,government bonds corporate bonds,and loans by financial institutions.

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