There are two options open to you if you decide to invest in a company: equity (commonly known as stocks or shares) and debt (also known as bonds). Firms issue shares, which are valued every day and posted on a stock exchange. In contrast, bonds function more like loans where the investor is the creditor.
Only businesses looking to raise capital for capital projects, more company growth, or diluting owner shares issue equity stocks. Bondholders are owed money by the business. Part of the corporation is owned by equity holders. In the event that the company files for bankruptcy, bondholders are given preference.
Meaning of Equity
Equity in the context of finance refers to ownership of assets with potential obligations such as debts. For accounting reasons, equity is calculated by deducting liabilities from the value of the assets.
Equity (ordinary) shareholders are still entitled to a portion of the profits and assets of the company. They are the company’s legitimate owners. Equity shares do not accumulate dividends, and the dividend rate is unknown. No maturity date exists for equity shares.
Meaning of Bond
A bond is a type of long-term debt security. Government-issued bonds don’t run the risk of defaulting. The obligations on the government’s bonds will always be honored. Although public sector bonds in India are often secured, they nevertheless carry a small risk of default. Companies in the private sector also issue bonds, often known as debentures.
The interest rate on a bond or debenture is typically fixed and known to investors. After a predetermined amount of time, known as the maturity period, a redeemable bond or bond with maturity will pay back its principal.
Main Features of Bond (Debenture)
A bond (debenture) is often issued at a par value (e.g., Rs. 100 or Rs. 1000), and interest is paid on face value. Face value is commonly known as par value.
The interest rate is fixed and it is already known to bondholders (debenture-holders). The interest paid on a bond or debenture is tax-deductible. The interest rate is alternatively known as the coupon rate. Coupons are detachable certificates of interest.
A bond (debenture) is generally issued for a specific period of time. It is repaid on maturity.
Redeemable value, often known as maturity value, is the amount a bondholder (or holder of a debenture) will receive upon maturity. A bond may be redeemed at par, at a premium (more than par value), or at discount (less than par value).
A bond (debenture) may be traded on a stock exchange. The price at which it is currently sold or bought is called the market value of the bond (debenture). Since the market value fluctuates, it may be different from the par value or redemption value.