What are “Debt Capital Markets”?

Debt capital markets include the fixed income markets where sovereign governments, semi-government and supranational organizations (for example, the World Bank), financial institutions, and corporations issue debt in the form of bonds and loans. These instruments are issued by borrowers to raise capital to finance growth, acquisitions or expansion, or diversify their sources of funding. Debt capital market instruments (bonds and loans) differ in terms of maturity, risk profile, and terms. Bonds, which are debt instruments, are offered to a varied class of investors and are traded in the secondary market. Bond markets are categorized into specialist segments including, investment-grade bonds, high-yield or junk bonds, emerging market bonds, and securitized instruments.

Investment banks have debt capital markets divisions that work with clients such as corporations, financial institutions, and governments to issue fixed income instruments. They are responsible for the origination, structuring, execution, and syndication of a wide array of debt-related products.

Key Learning Points

  • The bond market offers instruments of varying maturities ranging anywhere from three to 10 years and long-term bonds, which vary in maturity from 10-30 years.
  • The bond market includes government bonds, corporate bonds, emerging market bonds, municipal bonds, leveraged loans, and asset-backed.
  • Securitization is a process through which certain types of illiquid assets/claims/debt are pooled together to create tradable securities based on these assets.
  • The common types of securitized debt instruments are mortgage-backed securities, collateralized debt obligations, and asset-backed.
  • The Debt Capital Markets (DCM) group within an investment bank generally includes four groups: origination, structuring, execution, and syndication.
  • Bond pricing depends heavily on timing and market sentiment…
  • The price of a bond depends on the periodic (annual, semi-annual etc.) coupon payment, the par (face) value, and the interest rate used to discount future cash flows, and yield to maturity (YTM).
  • The YTM estimates the total rate of return to the bondholder who buys a bond at a specific price, holds it to maturity and collects all coupon payments and principal repayment as scheduled.

Bond Markets and Types of Issuers

The bond market offers instruments of varying maturities, ranging from short-term bonds to intermediate and long-term securities. Intermediate-term bonds typically have maturities up to ten years, while long bonds mature in 10-30 years.

Bond issues can be underwritten by the investment bank, meaning that they purchase the newly issued bonds from the issuer and sell them. Syndication takes place when an issue is too large for one bank and multiple institutions participate in the underwriting.  The bond market includes government bonds such as US Treasurys, municipal bonds, and sovereign bonds, as well as corporate bonds, emerging market bonds, leveraged loans, and asset-backed securities.

Government bonds: governments around the world issue bonds to finance their expenditures and the fiscal deficit. They are risk-free but the terms and coupon rate rely on how the market views the creditworthiness of the issuing country. Since these bonds are generally backed by the full faith of the government, they are considered risk-free.

The US is the largest bond market in the world (accounting for around 40% of the global bond market) and among the most liquid. U.S. Treasurys range in maturity from one month to 30 years and include T-bills, notes, and bonds. The US government also offers Treasury-Inflation Protected Securities (TIPS) to help investors protect themselves against inflation.

Corporate instruments include commercial paper, investment-grade bonds, high yield bonds (i.e. below investment grade or junk bonds), and leveraged loans. These bonds are usually issued by large companies to fund expansion, capital expenditures, or M&A activity. They may also issue new debt on improved terms to retire existing debt.

Commercial paper is typically issued by the most creditworthy companies as these debt instruments are not collateralized. The typical maturity is no more than 270 days in the U.S. These debt instruments are issued at a discount to face value.

Investment-grade bonds: are issued by the most creditworthy companies, and receive the highest ratings from rating agencies like Standard & Poor’s, Moodys, and Fitch. For example, an S&P rating of AAA is the highest rating issued by the agency. An AAA indicates the bond issuer has a strong capacity to meet cop=upon and principal payments and the risk of default is extremely low.  i

High yield, or junk bonds: rated BB+, Ba1, or lower are considered to carry higher default risk than investment-grade bonds and thus pay higher coupon rates. These bonds are generally issued by companies that may have difficulty meeting debt obligations in full and on time. Junk bonds typically have a comparatively shorter tenor, with maturities of 10 years or less.

Leveraged loans: are extended to companies that have a poor credit history or substantial debt. They are typically syndicated and are used for financing by highly levered or speculative companies.  Higher leverage implies a higher risk of default and bankruptcy, so these loans carry higher interest rates and stricter covenants.

Emerging market bonds: are issued by developing countries, usually by their respective governments, but they may also be issued by corporations. Their credit ratings are lower than those of developed market bonds, which results in higher yields. While investing in emerging market fixed income offers certain advantages, there are also risks from political instability, economic disruption, inflation, less developed regulatory and legal frameworks, and the inability to repatriate earnings. They also are more vulnerable to geopolitical events and carry interest rate risk, liquidity risk, and exchange rate risk. Investors may suffer from a lack of transparency from issuers and in financial markets, and assets can be subject to appropriation. Collectively, this is referred to as country risk.  Default risk is elevated and consequently higher interest is paid on emerging market debt.

Municipal bonds: are issued by states, municipalities, and counties in order to finance large capital expenditures such as infrastructure projects. These bonds are generally investment grade but are less liquid than Treasurys.


Securitization is a process through which illiquid assets such as car loans, student loans, mortgages, credit card debt,  and trade receivables are pooled and packaged into tradable securities. These are called asset-backed securities (ABS) and are interest-bearing. Securitization is a means to transfer credit risk as well as a vehicle to raise money in the capital markets.  From a capital markets perspective, the advantage of securitization is that these instruments can provide diversification benefits for institutional investors.

Types of Securitization

Asset-backed securities (ABS) are securities backed by assets that generate income, for example, auto loans, student loans, home equity loans, and credit card receivables. Residential and commercial mortgages are not included.

Mortgage-Backed Securities (MBS) are repackaged residential or commercial mortgages secured against real estate. They are similar to asset-backed securities.

Collateralized Debt Obligations (CDO), which are also asset-backed securities, are complex structured products backed by pools of loans and other assets. The assets serve as collateral should the loan default. Assets such as auto loans, student loans, and credit card receivables can be packaged and in different tranches, depending on the level of credit risk for the investor. CDOs can help investors transfer risk and free up cash. CDOs can be sold directly to institutional investors by the structures, and they also trade in the secondary market.

Debt Capital Markets – Investment Banking

Within an investment bank, the Debt Capital Markets group is involved in every aspect of the debt markets, including corporate bonds, muni bonds, Treasurys, and structured products. They advise clients ranging from corporations and sovereigns to municipalities and supranational organizations on raising capital by issuing debt.

The four groups within the Debt Capital Markets include:

The Investment Grade Capital Markets Group: works with corporates that have high credit ratings. This group provides guidance and advice as well as sales and execution. They focus on investment-grade bonds, which are syndicated and sold to outside investors.

The Leveraged Finance Capital Markets Group: deals with high-yield bonds and clients with significant amounts of debt. These clients may be undertaking leveraged buyouts (LBOs) or recapitalizations.

The Structured Finance Group: deals chiefly with structured finance tools, for example, securitization, which includes the process of repackaging various assets, that range from mortgages and car loans, aircraft loans, royalties, and intellectual property into traded paper. Examples of structured finance products include collateralized debt obligations, collateralized bond obligations, syndicated loans, and credit default swaps among others.

The Emerging Markets Financing Group: works with issuers in developing or emerging markets. This debt is considered to carry higher risk and credit ratings are typically lower than similar companies in developed markets. Consequently, they pay higher coupon rates.

Debt Capital Markets Group: professionals advise the issuers of debt (government or corporate debt) on prevailing market conditions and strive to become the lead manager for bond issues. Market specialists in the group determine the timing and pricing of the issue.

Bond Pricing – Key Factors, Formula, and Example

A bond’s price is the present value of the future cash stream it generates. To calculate the bond prices, add the present values of all the coupon payments to the present value of the par value at maturity. Bond pricing is also underpinned by timing and prevailing market sentiment. When buying a bond, investors assess several factors.

The first key factor is credit quality, represented by the issuer’s credit rating. Next, the maturity or term of the debt or bond is important taken into account. Bonds with short tenors are less risky than long bonds. The size of an issue and the frequency of borrowing is important, as well as the liquidity in the secondary market.

The formula for pricing a bond is given below. The price is calculated using the periodic (annual, semi-annual etc.) coupon payment, the face value, the discount rate (or yield to maturity), and the years to maturity. , par value of the bond, rate of interest to discount the future cash flows, which is termed as yield to maturity (YTM), and years to maturity.

Bond Price Formula

Bond Price = C*  (1-(1+r)-n/r ) + F/(1+r)n

where C = Periodic (for example, annual) coupon payment

F = Par value of the bond,

r = Yield to maturity (YTM), which is the interest rate or required yield

n = Years to maturity

In the example below, assume that Company A has issued a bond with a par value of US$ 120,000. It carries an annual coupon rate of 8% and matures in 10 years. The prevailing market rate of interest (YTM) is 10% and is used to discount future cash flows.

Using the formula above, the price of the bond is US$105,253.04.

As the YTM is greater than the coupon rate, the par value of the bond is greater than the bond price. Therefore, the bond is said to be traded at a discount. Had the coupon rate been higher than the YTM, the par value of the bond would have been lower than the bond price. As a result, the bond would have been said to be trading at a premium.

Debt Capital Markets


In an investment bank, the Debt Capital Markets (DCM) group is involved in every aspect of a bond’s life, from origination and structuring to execution or syndication. They work on behalf of issuers including governments, financial institutions, corporations, and municipalities.

Investment banks are intermediaries between a company or government that wants to issue new debt and the investors who want to buy it. Companies and governments hire investment banks when they want to issue new bonds, and the bank has to both value the company and determines the level of risk in order to issue, price, underwrite, and sell new issues.