This chapter describes the many different types of debt securities available for corporations and other borrowers. The number and variety of debt instruments, which are used in global finance today, are amazing. One might wonder, why so many different forms? The answer lies in the fact that selling securities to raise money is essentially a marketing problem and investment bankers and corporations try to appeal to potential lenders in many different ways; just like an auto manufacturer offers so many different models with different market segments in mind.

Debt is broadly differentiated as public issue bonds, convertible bonds, bonds with warrants, private debt, asset-backed securities, and project financing. All are promissory notes, although each has characteristics peculiar to it. The bond contract contains the specific terms, called covenants; to which borrowers and lenders agree. Bonds contain such features as being fully registered, unsecured, subordinated, mortgage, collateral trust, a variety of repayment provisions, and restrictive provisions. Debt is either sold publicly or placed privately. Privately sold debt is less costly to issue, contains nonstandard features, and imposes more restrictive terms on the borrower. Debt securities can be issued within one's own country or overseas and in many different currencies. Financial innovation is alive and well in debt markets with corporations coming up with new types of debt all the time.

Warrants and convertible securities are among the earliest of corporate financial innovations. The typical convertible security is a long-term option that is attached to a bond or a preferred stock and it gives its holder the option to exchange the bond or preferred stock for another security of the company, usually common stock. The most common warrant is a long-term call option that is attached to a bond or a stock issue. It usually gives its holder an option to buy for cash another security of the company, usually its common stock.

The chapter also describes the typical provisions and covenants seen in debt contracts and the rationale for these. Financial managers should have the general awareness and knowledge of the common provisions contained in debt contracts and understand the need for the same. The manager's familiarity will help her understand why a certain kind of debt might be of better value for the company in a certain situation. Here are a few points to keep in mind:

• Each financial manager should know the type of debt and its covenants that are best for him or her or the company. There is no "one size fits all" approach in financing.
• Be aware of the major distinctions between debt sold to the public and privately placed debt. The former contract is more complex and the characteristics and formats are more standardized. However, the restrictive covenants of publicly sold debt are less severe than privately placed debt. Issue costs for the former is higher, but the interest rate may be somewhat less.