If the equity market is the place where the company's owners meet then the debt market is best described as the place where the company's lenders meet. Most companies would in fact have accessed debt markets long before they decide to issue public equity. As a startup, they would have resorted to their family and friends to provide them with loans. Then they might have moved on to banks. Providing them with intermediated loans and credit. After that, they might have got access to the money market, where short-term loans could be secured, or maybe even longer term borrowings through the bond market. There's a large number of assets, securities traded on debt markets. This list here is what you would find typically on the balance sheets of many corporations. But there are also government securities in this list and they're there for a good reason. To summarize the securities, we typically distinguish them by issuer, by the risk profile of that issuer, and by the duration or the maturity of those instruments. So to better understand that, consider the debt market as a two tiered market. Short-term market, and a long-term market. The money market instruments are short-term instruments, up to 1 year to maturity typically, that provide the investor or the lender, with the face value of the loan at maturity. Investors would pay at a discount to that face value. We will see how that works when we talk about price discovery in debt markets. The second tier of the debt markets, the long-term market is where bonds are traded. And bonds are long-term instruments. Beyond 1 year that is. And they pay the investor, not just the face value at maturity of the instrument, but also a regular series of interest payments, known as coupons, over the lifetime of the bond. So how is debt issued? Well the list looks not that dissimilar from what we've seen for equity. It's a comprehensive process again. So when the company decides to borrow directly from investors, as distinct from borrowing from a bank, intermediated or in direct finance, the company would be assisted by commercial banks, dealers, brokers, in providing excess to the debt markets. Again, a prospectus would be drawn up which tells the investors about the financial health, the financial position of the corporation. Due diligence would be provided by accountants, but, very importantly, for this market, by rating agencies. We'll see what their role is in some detail. Then the road show will occur, and the commercial banks will assist in the marketing process of the bond or the money market instruments to investors. After that, the issue yield, the price at issue will be determined. And an allocation or a possible quota. How many bonds, how many money market instruments will be issued to specific investors. That can go or can be determined through an auction process or through a book build process. Again when we talk about price discovery, we'll briefly touch on the distinction between those two methods. And lastly on the list, as it was with equity, finally, the corporation is receiving the funds that it can then invest in its investment projects. So what do these rating agencies in fact do? The rating agencies that provide part of the due diligence. Well, just as external accounting auditors assess the accuracy of the company's accounts, for the benefit of the shareholders, rating agencies assess the solvency and liquidity of the corporation. Its ability to pay these regular payments for the long-term investments, for the long-term bonds and the face value repayment at maturity of the money marketing instruments or the bond instruments. So some examples of those rating agencies are, of course, the well-known Standard and Poors, and Moody's, providing exactly that kind of service to the debt investors. So what happens once the debt instruments have been issued? Well debt markets, quite unlike equity markets, are mostly what we call over the counter, OTC they're wholesale markets. So only a small number of players participate in this market. Not retail investors. Dealers in these markets act as the market makers. Once issued, the debt instruments can be traded on the secondary market. Very similar to what happens in the equity market. On this secondary market, dealers and brokers bring customers, investors together, providing an opportunity for debt investors to sell on their securities to new debt investors. The investors directly contact their brokers who will then contact the dealers, who will quote buy and sell prices for their bonds, for their money market instruments. It's worth noting now that there are now also limited opportunities for retail investors to participate in this bond and money market. So where exactly does the debt market differ from the equity market? Well continuous price discovery occurs on both secondary market for debts, for equity. It provides an opportunity for the debt holders to sell their debt instrument at a fair and transparent price. So that much is similar between debt and equity. But debt instruments, unlike equity, do have a finite life, the maturity of the instrument as the company repays its debt. It's also worth noting that debt holders, investors in debt, do not actually share in the profits of the firm, unlike the owners of the company, the shareholders. Nonetheless, debt holders still very much care about the financial health of the corporation. The corporation's ability to repay its debt.
