This lesson explores the long-term funding options available to an organisation, focusing on bond markets and debt capital markets (DCM). The AFP’s CTP curriculum includes a comprehensive “Capital Markets” module covering debt markets .

2.1 Bond Fundamentals

A bond is a debt security where the issuer borrows capital from investors and promises to repay the principal at maturity, plus periodic interest payments (coupons). Key features include:

• Face Value (Principal): The amount repaid at maturity.

• Coupon Rate: The annual interest rate paid on the face value.

• Maturity Date: The date on which the principal is repaid .

2.2 Bond Valuation

The value of a bond is the present value of its expected future cash flows (coupon payments and principal) discounted at an appropriate rate. The yield to maturity (YTM) is the total return anticipated on a bond if held until it matures. There is an inverse relationship between bond prices and yields: when yields rise, bond prices fall, and vice versa .

2.3 Credit Ratings and their Impact

A credit rating assesses the creditworthiness of a bond issuer. Ratings from agencies like S&P, Moody’s, and Fitch are critical in determining the interest rate a company will pay. Investment-grade ratings (e.g., BBB- or higher) indicate lower default risk and allow the issuer to borrow at lower rates compared to speculative-grade (“junk”) bonds .

2.4 Debt Covenants and Loan Agreements

Loan agreements and bond indentures often include covenants—conditions imposed on the borrower to protect the lender . They can be affirmative (e.g., providing audited financial statements) or negative (e.g., limiting the amount of additional debt the company can take on). A breach of a covenant can lead to default .