Question

I. There are two main sources of capital - debt and equity. The total value of investments financed by bonds (debt) is about four times the value of investment financed by shares on global market

   I Discuss two reasons why you think this is the case.

   ii Discuss two largest borrowers of bonds

iii Discuss two largest lenders of bonds

Answer 1

i) Reasons for more debt financing compared to equity -

The owners of the entity it shareholders most of times prefer to raise capital because of many reasons . Some of the significant items are debt financing does not dilute the control of the entity. The cost of debt is generally lower when compared with the equity . Interest payments on debts are generally tax deductable. More over inorder to raise debt the compliance costs are relatively lower. When ever an entity gets fund through public they tend to follow many rules and laws.

ii)Two largest borrowers of bonds -

Government - Government is the significant borrower of bonds . Generally they do this inorder to fill the gap between the revenue and costs. When ever they need make large infrastructure projects they generally raise funds through bonds. Bonds pay a significant role for gap funding in government sector. United states have one of the biggest bond markets.

Corporate entities - Corporate entities generally raise bonds inorder to fund their capital. Bonds is a cheap source of capital financing.

iii) Largest lenders of bonds -

General Public - Bonds play as a savings to general pubic . It is through bonds they can even generate regular income

Banks, Finacial institutions, Mutual Funds etc- Generally these entities fund the borrowers through bonds. More bonds help these entities to mobilize their excess funds . Income is also generated through purchase of bonds. Mutual funds and portfolio managers use bonds to reduce the volatility of their portfolio and hedge their portfolio with fixed income securities.