Purpose and benefits

The costs of borrowing are primarily made up of interest and issuance expenses. The interest rate assigned to a particular debt instrument is based on the level of default risk assumed by the investor. Several rating agencies assess the default risk of public debt issuances and provide a rating that is indicative of credit quality. The credit quality is greater for secured/collateralised senior debt than for unsecured subordinated debt issued by the same company, and hence, the former typically carries a lower rate of interest. Firms that have higher levels of debt must typically pay higher interest rates to investors to compensate them for the increased risk of default. Capital-intensive businesses can usually maintain greater debt-to-capital ratios for the same level of borrowing costs as businesses that are less capital intensive.

Related Solutions

Audience

For managers at all levels

Learning method

Management checklist, answers to FAQs, common traps, and suggested action plans.

Time to Complete

10 mins

Length

4 Pages

Participants

1

Price

£2 Pounds Sterling
(inc. VAT)