Question

How can you tell if a particular security is debt or equity?

Answer 1

• A debt security is one that has a fixed obligation on the issuer to pay interest/ coupon to the lender.
• A debt security is seen on the liabilities side of the issuer.
• When investing in a debt security, there are various areas to assess it on such as coupon rate, tenor (term of debt security), yield to maturity, face value and market price.
• A debt security holder is a lender to the issuing company, not an owner.
• A debt security also has lower risk compared to an equity security.

• An equity security, on the other hand is one that does not have any fixed obligated payments for the issuer.
• After paying interest to the debt holders, the company may/ may decide not to declare and pay dividends to its equity shareholders.
• An equity share holder is the owner of the company and holds voting rights on major decisions for the company, example dividend declaration, a merger/ acquisition deal.
• Historically, equity securities have provided higher returns, as compared to debt securities, however with higher risk (standard deviation)