from such retained earnings adds to the value of the firm and hence raises
the market value of existing shares.
Debt
The firm’s creditors are not owners; they have lent money in return for
some form of loan agreement, or IOU. Firms often borrow from
commercial banks or other financial institutions, who channel money
from their depositors to borrowers. Firms can also choose to borrow
money directly from non-bank lenders, with whom there are many
possible types of loan agreements, which are collectively called debt
instruments or bonds. Two characteristics are common to all loan
agreements. First, they carry an obligation to repay the amount borrowed,
called the principal of the loan. Second, they carry an obligation to make
some form of payment to the lender called interest. The time at which the
principal is to be repaid is called the redemption date of the debt. The
amount of time between the issue of the debt and its redemption date is
called its term.