In a nutshell, both debt and equity securities are financial instruments that assist companies to finance their operations.
Debt securities are legal obligations to repay borrowed funds at a specified maturity date and provide interim interest payments as specified in the agreements. The examples include commercial papers, bonds, loans, debentures, and T-bills among others. The benefits of issuing debt securities of companies are that the interests paid are tax-deductible: i.e., they are expensed so that companies pay less tax; they protect companies from losing control over operations; and also help discipline management.
On the other hand, debt securities increase the probability of bankruptcy and expected bankruptcy costs; reduce financial flexibilities due to negative covenants among others.
Equity securities represent an ownership stake in a company, such as common and preferred shares. Shareholders are entitled to dividends from post-tax earnings which are taxed at a lower rate than interest payments received for bonds. However they receive dividends only after all creditors have been paid.
return on capital employed (ROCE) is net income/(debt&equity) whereas return on equity is income/equity (without debt).
similarities between equity n debt finance
Bondholders own a share of the debt of a company. Stockholders own a share of the equity of a company.
Security is a broader term which includes shares as well. There are two types of securities, Equity security and Debt Security. Equity security comprises Share, Common Stock, Options etc. while Debt security comprised of Bonds, Debentures, Bank Notes, Coupons etc. The dictionary meaning of security is something which is secured. But equity shares are not secured i.e., equity shareholders are repaid their money only after the Company repays the pref shareholders and other pref creditors and only if the company has enough money to repay it.
Equity is bought and sold in the stock marketwhile debt is bought and sold in the bond market.
return on capital employed (ROCE) is net income/(debt&equity) whereas return on equity is income/equity (without debt).
Global equity and bond funds maintain a portfolio of securities and debt instruments traded worldwide
Security is a broader term which includes shares as well. There are two types of securities, Equity security and Debt Security. Equity security comprises Share, Common Stock, Options etc. while Debt security comprised of Bonds, Debentures, Bank Notes, Coupons etc. The dictionary meaning of security is something which is secured. But equity shares are not secured i.e., equity shareholders are repaid their money only after the Company repays the pref shareholders and other pref creditors and only if the company has enough money to repay it.
similarities between equity n debt finance
Equity is the proportion of those assets you own, compared to the debt on those assets. An example would be a house. A house is an asset. The equity is the amount of the mortgage that is paid off plus any appreciation the value of the house. Same with a company. Its the difference between what you own and the debt or liabilities. Assets minus liabilities equals equity. You have equity in assets.
Bondholders own a share of the debt of a company. Stockholders own a share of the equity of a company.
"Trading securities are debt and equity securities that the company intends to actively manange and trade for profit." (Chiappetta, Larson, Wild, Fundamental Accounting Principles, 18th Ed., McGraw-Hill 2007, page 589)
The two types of financial assets created in the process of direct financing are equity securities and debt securities. Equity securities represent ownership stakes in a company and include stocks or shares. Debt securities are loans made to a company and include bonds or notes, which represent the company's promise to repay the borrowed funds with interest.
Security is a broader term which includes shares as well. There are two types of securities, Equity security and Debt Security. Equity security comprises Share, Common Stock, Options etc. while Debt security comprised of Bonds, Debentures, Bank Notes, Coupons etc. The dictionary meaning of security is something which is secured. But equity shares are not secured i.e., equity shareholders are repaid their money only after the Company repays the pref shareholders and other pref creditors and only if the company has enough money to repay it.
Security is a broader term which includes shares as well. There are two types of securities, Equity security and Debt Security. Equity security comprises Share, Common Stock, Options etc. while Debt security comprised of Bonds, Debentures, Bank Notes, Coupons etc. The dictionary meaning of security is something which is secured. But equity shares are not secured i.e., equity shareholders are repaid their money only after the Company repays the pref shareholders and other pref creditors and only if the company has enough money to repay it.
Equity is bought and sold in the stock marketwhile debt is bought and sold in the bond market.
Debt equity ratio = total debt / total equity debt equity ratio = 1233837 / 2178990 * 100 Debt equity ratio = 56.64%