- To issue a debt instrument, such as a bond or a mortgage that is a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest and principal payments) until a specified date (the maturity date),
- A short-term debt instrument for the maturity is less than a year
- Long-term for the maturity is ten years or longer.
- Debt instruments with a maturity between one and ten years are said to be intermediate-term.
- An equity holder is a
residual claimant; the corporation must pay all its
debt holders before it pays its equity holders.
- Equity holders benefit directly from any increases in the corporation’s profitability or asset value because equities confer ownership rights on the equity holders. Debt holders do not share in this benefit, because their dollar payments are fixed.
The New York stock exchanges, NASDAQ, Cambodia Securities Exchange in which issued stocks are traded, are examples of secondary markets,
When an individual buys a security in the secondary market, the person who has sold the security receives money in exchange for the security, but the corporation that issued the security acquires no new funds. A corporation acquires new funds only when its securities are first sold in the primary market.
- They make it easier and quicker to sell these financial instruments to raise cash; so they make the financial instruments more liquid. The increased liquidity of these instruments makes them more desirable and easier for the issuing firm to sell in the primary market.
- They determine the price of the security that the issuing firm sells in the primary market. The investors that buy securities in the primary market will pay the issuing firm or corporation no more than the price they think the secondary market will set for this security. The higher the security’s price in the secondary market, the higher will be the price that the issuing firm will receive for a new security in the primary market, and the greater the amount of financial capital it can raise. Conditions in the secondary market are the most relevant to corporations issuing securities.
- Frederic S. Mishkin