Paper about Finance Debt, Derivative, and speculation on financial Essay

Paper about Finance Debt, Derivative, and speculation on financial instruments - Essay Example Debt financing is a tool employed by firms to raise capital and expenditure funds through sale of bonds, notes or bills to investors who may be institutions or individuals. The buyers are promised repayment of the principal plus interest on their investment and as such are creditors to the selling firms. The term ‘debt financing’ may carry some negative look but this tool of financing is really helpful in raising starting business to run operations. Even firms with very healthy balance sheets resort to raising working capital through debts. It is also known as leverage in financial terms. When used well debt financing may help firms take advantage of lower interest rates from financial institutions and as such obtain cheap capital. The firm has therefore obtained capital readily, is repaying at lower interest rates and the repayment is spread over a period of time. If carefully employed debt financing is a sure way to obtain capital and maintain ownership. After the obtaining funds from the lender the only obligation is to repay back with interest. The borrower has the advantage as they invest the funds in their business without any interference. Firms also enjoy the benefits of tax deductions on the borrowed funds as well as the interest hence if carefully invested debt financing is a cheap source of capital. However debt financing may come with negative effects if misused; the borrower is obligate to repay regardless of the macro-economic environment hence it can result in to bankruptcy and legal suits. The borrowed funds also have to be repaid with interest and it affects a company’s credit score. Another financial tool in the world of business involves financial derivatives. This instrument of finance is associated with an indicator of finance or a commodity and through these certain financial risks