What Is the Debt Capital Market (DCM)? (2024)

Debt capital markets (DCM) is a division of investment banking and a concept in corporate finance. As a financial concept, debt capital markets are places for companies and governments to buy and sell debt to raise capital or make profits. DCM divisions of investment banking companies facilitate the creation and sale of these tradable debt securities for their clients.

Debt Capital Market Definition

The debt capital market (DCM) is an exchange for debt securities. In other words, in DCM, finance professionals facilitate companies selling debt (usually in the form of bonds) to investors so the company has more capital to accomplish its goals. a

Selling debt may sound odd, but it’s akin to taking out a large-scale loan. The company gets an influx of cash and the investor, usually another company or government, earns interest on the investment, similarly to how a bank would when they extend things like mortgages or auto loans to customers. Debt securities are considered a low-risk investment, as the issuing company is expected to pay them back at a fixed-interest rate and within a specified time period.

Key Terms for Understanding DCM

Bonds

A bond is a type of investment. Companies create bonds that investors buy; the investor essentially loans the company money by purchasing a bond. In return for loaning (or investing) that money, the buyer receives the promise of future repayment and a fixed rate of interest above their initial investment.

Companies, organizations, and governments issue bonds for other entities to buy so they can fund projects quickly. Bonds also include a contract that explains how much the bond is worth, when it must be repaid, and how much interest will be charged.

Fixed-Income Markets

Debt capital markets are also called fixed-income markets because investors see a stable, or fixed rate of return on their investment — an interest rate.

Interest Rates

An interest rate is a percentage of a loan, or lended money, that borrowers must pay back to the lender in addition to the original amount. Most bonds have a fixed interest rate, meaning the issuer sets the rate when the company issues the bond and it doesn’t change over the life of the bond. However, some debt securities have variable interest rates, meaning the interest rate can change based on an underlying metric, such as market conditions.

Primary Market

In the primary debt capital market, governments and companies issue bonds directly to the consumer, such as a company looking to secure debt funding.

Secondary Market

The secondary debt capital market involves the resale of already issued bonds for a higher or lower price, depending on the market.

Types of Securities in DCM

Debt capital markets rely on the same premise as the investing world at-large — one entity (the issuer) offers a security for sale, and another entity (the buyer) purchases the security. The issuer profits from the sale of the security; the buyer gains capital to accomplish goals. The main difference is the securities in DCM are bonds, rather than stocks or shares of a company.

Some common types of bonds bought and sold in debt capital markets are:

• Investment-grade bonds: Bonds that are low risk (likely to be repaid with interest)
• High-yield bonds: Bonds with high returns (high interest rates), but also often high-risk (less likely to be repaid with interest)
• Government bonds: Bonds issued by the government, also called Treasury bonds
• Emerging markets bonds: Bonds issued by the governments of developing countries, which typically have a high yield but greater risk of default than investment-grade or Treasury bonds

Debt Capital Markets vs. Equity Capital Markets

In capital markets, companies that issue debt securities must pay it back with interest. On the other hand, in equity markets, companies issue shares, or small pieces of ownership in the company, for investors to buy. Investors hope to see returns on their investment through a company’s profits and success. Equity may also include voting rights in the company’s leadership. Both debt and equity investments are capital the company can use to accomplish its goals.

In investment banks, debt capital markets and equity capital markets exist as departments where investment bankers, financial analysts, and securities traders buy and sell securities to raise capital.

DCM Careers and Skills

A career in a debt capital market group of an investment bank typically involves advising companies, governments, and institutions on the ways to raise money by issuing debt. This type of career in finance requires pitching clients, buying and issuing debt, facilitating these transactions, and researching market trends to jump on new opportunities.

Important skills needed for working in DCM, and for working in investment banking in general, include:

• Knowledge of investing concepts, like stock options
• Ability to work with a variety of financial models, such as discounted cash flow (DCF) valuation
• Analytical skills
• Understanding of how to calculate financial metrics, like compound annual growth rate (CAGR)

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