What Is the Debt Capital Market (DCM)?

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.

If you’re interested in investment banking and want to have a high-impact role that requires stellar financial and interpersonal skills, working for a debt capital market group might be a good career path for you. Here’s what you need to know about the debt capital market, including key terms, types of debt securities, and the skills you need to succeed in this field.

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. 

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.

What Do People in Debt Capital Markets Do?

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. 

People working in a debt capital markets group typically focus on a few main parts of the DCM process, including origination, structuring, underwriting, and marketing.

• Origination: Investment banks identify potential issuers, like corporations or governments, that may need to raise capital through debt.
• Structuring: Once the team has identified the issuer, they work with them to design the terms of the debt security, including the type of bond, maturity date, and interest rate.
• Underwriting: The team assesses the risk of purchasing the debt from the issuer, meaning they assess the issuer’s creditworthiness. Then, they determine the appropriate pricing for the bonds.
• Marketing: The team markets the bond to a wide range of investors and sells the debt securities to investors.

How to Land a Career in DCM

To land a career working in a debt capital market group, you’ll need to have the right financial skills and apply insider application tips.

Build Financial Skills

To enter this field, you’ll likely need a bachelor’s degree in a related subject area, like economics, math, or finance. Employers will expect that you’ve learned key financial modeling and analysis skills during your postsecondary education.

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)

Apply Strategically

Once you’ve built your skills, one of the best ways to enter the industry is with an internship.

>>MORE: How to Get an Investment Banking Internship

Finance internships, specifically those in investment banking, are notoriously competitive, which means it’s important to:

• Connect with relevant professionals. The cliché that it’s “who you know” matters in this field! Networking events (specifically those hosted by specific companies), LinkedIn, and campus-based clubs and organizations are great places to start. Focus on quality connections rather than quantity.
• Apply early. Recruiters start looking for potential interns long before the actual internship starts — timelines can start up to a year and a half before. 
• Apply intentionally. While applying to multiple companies can theoretically help boost your chances of landing an internship, make sure you’re applying to the right ones. Apply only to internships you’d truly consider taking, including the location and type of bank.
• Make your application stand out. Employers are looking for motivated students who have shown they’re leaders and have a growth mindset. Be sure to include relevant extracurriculars and projects on your resume, including Forage job simulations — free, online programs that demonstrate your interest and more than triple your chances of landing an offer.

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