An equity security refers to the contract that makes the owner of the security be part of the company that issued the security. An equity security has no maturity (Pratt, 2011). For instance, when an investor buys a company’s stock, he may own it forever or until the company shuts down. The type of payment the owner of equity security receives is the periodic dividend payment. Lastly, an equity security exposes the owner to a higher risk (Pratt, 2011). On major security exchange, the prices of stocks tend to be more volatile than bond prices (Pratt, 2011). Examples of equity security include stocks, shares, investment contracts and participation interests.
On the other hand, debt security refers to a contract showing a promise to pay the owner of security a given amount of money at a specified date in the future (Pratt, 2011). Therefore, a debt security has a specified maturity date in the contract that shows the time the investor will receive the original amount invested. The type of payment to the owner of security is periodic interest payment and the repayment of the principal amount at the date of maturity. Lastly, debt investments are less risky since legal contract backs the interest and principal payments (Pratt, 2011). Examples of debt securities include bonds, notes receivable, commercial papers and debentures.
Pratt, J. (2011). Financial accounting in an economic context. Hoboken, NJ: Wiley.
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