Question

1. Explain the following:

1. Debt financing
2. Equity financing
3. Investment banker
4. Bond Indenture
5. Primary market
6. Secondary market

Answer 1

(a) Debt financing :-In this financing,firm raises money for various purposes like working capital expenditure or Capital expenditure by selling debt instrument that means fixed income securities to investors.It is required to be paid back unlike equity financing.

(b)Equity financing:- In this financing ,Firm raises money by issuing stocks to investors .It is not required to be paid back .Investors gets proportionate ownership in the firm .Dividend is paid to investors in equity financing but that is not fixed ,it depends on firm itself whether to pay dividend or not.

(c) Investment banker:-This individual is primarily concerned with raising capital for corporation, government or other entities.They assist in pricing capital and allocate to its various uses.They often work with financial institutions.

(d)Bond indenture:-It is an agreement between issuer and trustee which specifies the responsibility of each party i.e, trustee ,issuer ,lender ,For example ,what action will be taken if issuer fails to make timely payments and also specifies characteristics of bond like maturity date ,coupon rate and other terms.

(e)Primary market:-It is the market where firm sells stocks or bonds for the first time, for example initial public offering,Private placement ,Preferential allotment etc.It is the market where securities are created.

(f)Secondary market :-As the name suggests ,Here ,investors trade in previously issued securities without the involvement of company who first issued these securities.When shares are traded at stock market like NASDAQ or New York stock exchange and all other exchanges in the world then it is called trading in secondary market.