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

Expert Solution

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)

jeff jeffy answered 1 year ago

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