Financial Management: Principles and Applications, 13/e

9.1 Overview of Corporate Debt

When a corporation borrows money to finance its operations, it can choose to either take out a loan from a financial institution, such as a bank or an insurance company, or sell bonds. When debt is incurred through a loan from a financial institution, it is often referred to as private debt because the debt is not publicly traded. In contrast, bonds are referred to as public debt because they can be traded in the public financial markets.

Because of the costs associated with issuing bonds, smaller firms raise debt capital almost exclusively by borrowing from banks. Large firms also borrow from banks, and, in addition, they raise debt capital by issuing bonds. These firms generally borrow from banks when they need ...