What does the cost of debt primarily depend on?

The cost of debt primarily depends on the type of debt and market benchmarks because these factors determine the interest rate that a borrower will have to pay. Different types of debt instruments, such as secured vs. unsecured loans, or bonds with varying credit ratings, carry different risk profiles and thus different costs associated with them. Market benchmarks, such as LIBOR or the yield on government bonds, also play a significant role, as they reflect the prevailing interest rates in the economy, influencing what lenders are willing to charge borrowers.

In this context, understanding the relationship between the type of debt and market conditions is crucial, as it provides insights into how external factors, such as the current economic environment and the borrower's creditworthiness, interact to establish the overall cost of borrowing. Other factors, such as cash flow projections, inflation rates, and the duration of the loan, may influence a company's ability to repay the debt or the lender's risk assessment but do not primarily determine the cost of debt itself.