Debt vs Equity Instruments
Characteristics of Debt and Equity Instruments
Team D: Steven Harrison, Jessica Jefferies, Arlene Rivera, Kairstin Roberts,
FIN476
Mr. Seth Fargen
January 29, 2007
Financial Instruments
Financial Instruments are the lifeblood of any successful company; they are like rivers of living water that brings life and nourishment in order to grow into a strong company. Financial Instruments fall into two categories, debt and equity. Debt is a financial instrument that is used to finance an organization by paying back borrowed capital with interest. Debt instruments are notes, loans, bonds, and debentures are used to pay for needs for an entity preferably in the short term. An advantage of good debt is the predictability of payments to investors. Investors can assume less risk of loss in their investment. Borrowed money that is used to obtain assets will allow a company to keep its profits. Another advantage of debt is that loans are usually tax deductible. Some disadvantages of debt are that a company must have sufficient cash flow to repay loans. Loans that are considered risky may require justification for the loan and require collateral to back up the loan should it result in default. The end result will more than likely be a much higher interest rate. Equity or common stock is a more basic form of an equity instrument. Common stock is ownership interest in a corporation, which includes interest on earnings. Interest on earnings translates to dividends as well as interest in assets distributed upon dissolution. Holders of common stock have a great opportunity to share the entity's profitability because of unlimited potential for dividends. Likewise, common stock holders also bear the greatest risk of loss because they are subordinate to all other creditors and preferred stockholders. The advantages of equity are that there is no obligation to pay back the amount invested. Businesses will have more cash available because of no debt payments.
Team D: Steven Harrison, Jessica Jefferies, Arlene Rivera, Kairstin Roberts,
FIN476
Mr. Seth Fargen
January 29, 2007
Financial Instruments
Financial Instruments are the lifeblood of any successful company; they are like rivers of living water that brings life and nourishment in order to grow into a strong company. Financial Instruments fall into two categories, debt and equity. Debt is a financial instrument that is used to finance an organization by paying back borrowed capital with interest. Debt instruments are notes, loans, bonds, and debentures are used to pay for needs for an entity preferably in the short term. An advantage of good debt is the predictability of payments to investors. Investors can assume less risk of loss in their investment. Borrowed money that is used to obtain assets will allow a company to keep its profits. Another advantage of debt is that loans are usually tax deductible. Some disadvantages of debt are that a company must have sufficient cash flow to repay loans. Loans that are considered risky may require justification for the loan and require collateral to back up the loan should it result in default. The end result will more than likely be a much higher interest rate. Equity or common stock is a more basic form of an equity instrument. Common stock is ownership interest in a corporation, which includes interest on earnings. Interest on earnings translates to dividends as well as interest in assets distributed upon dissolution. Holders of common stock have a great opportunity to share the entity's profitability because of unlimited potential for dividends. Likewise, common stock holders also bear the greatest risk of loss because they are subordinate to all other creditors and preferred stockholders. The advantages of equity are that there is no obligation to pay back the amount invested. Businesses will have more cash available because of no debt payments.
References: n.d. Securities Law. Financing Instruments. Retrieved January 27, 2007 from http://tenonline.org/art/sl/9207.html 1989. Woelful, C. Financial Instruments: Recent Innovation. Retrieved January 27, 2007 from http://www.eagletraders.com/advice/securities/financial_instruments_recent_in.htm Balance Sheets for Pfizer and Coke were retrieved from www.msnmony.com and www.finance.yahoo.com