Leverage

All corporations are financed by the sale of common stock, but some firms also rely on other financing vehicles, most notably debt. Debt takes various forms, such as loans from a bank, but this entry focuses on debt financing in the form of bonds. The typical corporate bond has a schedule of promised interest payments over the life of the bond, followed by the repayment of principal that the bondholders advance to the firm when the bond is first issued.

If a firm uses debt financing, it is said to be leveraged. Thus, leverage refers to the use of debt by corporations as a source of funding, that is, as part of their capital structure. The degree of leverage, or reliance on debt, can be measured ...