We associate the term debt finance with O a. financial intermediaries, and we associate the term equity finance with financial markets. O b. the stock market, and we associate the term equity finance with the bond market. O c.financial markets, and we associate the term equity finance with financial intermediaries. O d. the bond market, and we associate the term equity finance with the stock market.
The correct answer and explanation is:
The correct answer is:
d. the bond market, and we associate the term equity finance with the stock market.
Explanation:
Debt finance and equity finance are two primary ways businesses raise capital. Understanding the distinction between the two helps investors and businesses make informed financial decisions.
Debt Finance (Bond Market)
Debt finance refers to raising funds by borrowing, typically through loans or the issuance of bonds. When companies or governments need money, they often issue bonds that investors buy. These bonds act as loans, and the issuer promises to repay the principal amount with interest over a fixed period. Since bonds represent borrowing, they are associated with the bond market. Financial intermediaries, such as banks, may also facilitate loans, but the term debt finance is most commonly linked to bonds.
Key Features of Debt Finance:
- Fixed interest payments (coupon payments)
- No ownership dilution for shareholders
- Repayment obligation, regardless of company performance
- Lower risk for investors compared to equity
Equity Finance (Stock Market)
Equity finance involves raising capital by selling shares of ownership in a company. When a company issues stock, it provides investors with a claim on its future earnings and potential dividends. Unlike debt financing, equity does not require repayment, but shareholders bear the risk of business performance. The stock market is where shares are bought and sold, making it the main platform for equity financing.
Key Features of Equity Finance:
- No repayment obligation
- Ownership is shared with investors
- Potential for higher returns but higher risk
- Dividend payments depend on company profits
In summary, the bond market is primarily associated with debt finance, while the stock market is associated with equity finance since stocks represent ownership in a company.
Here is the generated image illustrating the difference between debt finance and equity finance. Let me know if you need any modifications or additional details!
