Debt versus Equity Offering Size. In the aggregate, debt offerings are much more common than equity...

Debt versus Equity Offering Size. In the aggregate, debt offerings are much more common than equity offerings and typically much larger as well. Why?

Debt versus Equity Flotation Costs. Why are the costs of selling equity so much larger than the costs of selling debt?

Bond Ratings and Flotations Costs. Why do noninvestment-grade bonds have much higher direct costs than investment-grade issues?

Expert Solution

From the investment bank perspective, debts are relatively easier and less riskier to sell compared to equities. Large chunks of debt can be sold to comparatively smaller number of buyers like pension funds and insurance companies compared to the equity securities. Debt securities are also easier to be priced compared to the equity securities.

Equity holders will always expect a higher return on investment than the debt holders as they assume the highest risk. Equity holders are always paid after paying the creditors and not entitled to the repayment of a contractual obligation on their capital.

Non investment grade bonds are riskier and difficult to market from the investment bank's perspective and therefore have higher direct costs compared to the investment grade bonds. Non investment grade bonds provide with higher yields compared to investment grade bonds but its speculative, unsecured nature and higher chances of default of the non investment grade bonds lead to a lower credit rating.

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