Question

1. Distinguish between debt security and equity security. Discuss the advantages and disadvantages of owning debt security versus equity security.

Answer 1

1. debt securities means all securities which will be acting as debt instruments and they will be providing with creditors rights.

Equity securities are representative of rights of ownership in a company.

Debt securities generally receive fixed payment in form of interest whereas equity securities does not have any fixed payment guarantee.

Interest to be paid to debtsecurity holders are mandatory in nature whereas dividend payments to equity shareholders are not mandatory in nature.

Equity shareholders will not be having preferential claims and they will be having residual claims where as debt securities will be having preferential claims on assets in terms of liquidation.

cost of debt securities are generally lower than the cost of equity securities because interest are tax deductible in nature.

Advantages of owning debt security is that it will be helpful in order to receive fixed payment and the payment which are received are tax detectable in nature as well as it will have preferential claim on the Assets of the company in terms of liquidation.

disadvantages of debt securities are that these security will not be having any voting rights and this security will not be gaining through appreciation of the shares and return on the securities are fixed.