![]() And you have to pay back the money,Ībove and beyond the interest, over this time schedule. Million, and they say OK, here you go, and we'll give it to youįor this interest. Where you literally go to the bank and say hey, I need $6 Debt could be just in theįorm of a bank loan. Other way, and we'll talk about other forms ofĮquity, preferred stock and all of that. Raise debt, and actually there's a lot of ways youĬould raise equity, it actually doesn't have Shares, that's 10 million shares of stock. You're familiar with this already- this isĮssentially stock. $4 million, or essentially, $0.40 a share, or something. Those stock certificates will own one ten-millionth of this Have $10 million and I owe people $6 million, what's leftįor the owners of the company? Well, the owners of The equity- and the way you have to view it is OK, if I Just think of a good round number- the assets are Other than debt, per se, but that's all we'll worryĪbout right now. And then we have the debt, theĭebt of the company, or the liabilities. So let me just draw theīalance sheet for the fictional company. Something that can be bought and sold that has some type ofĬlaim on something, or some type of economic value. You know what equity securitiesĪre, and just so you know, what is a security? A security is essentially Maybe you didn't have a more exact idea of what they are. Into securities, that you're probably familiar with, but Partial owners of it, and that is equity. Itself, or essentially allowing other people to become Two ways that a company can raise capital. This is known as credit risk ("Junk Bonds" are bonds that have a low credit rating, meaning there is a higher risk of default). The risk that a company or entity will default is reflected in the "Credit Outlook" or "Rating" done by third-party auditors. You will be first in line to receive any payments from that, but there's no guarantee regarding how much it will ultimately be, if anything. You are now a creditor against the company, essentially waiting for them to liquidate their assets or restructure. What happens if that company goes bankrupt before you've been paid back? Well, first off there goes your guarantee. When you purchase a bond, you are lending your money to an entity and they are promising to pay you interest as well as give you your money back at the end of the term. The guarantee that comes with bonds is only as good as the solvency of the company or entity backing that guarantee. ![]() Since you mentioned the "guarantee" part of a bond, I'll focus solely on that. There can be a large amount of risk in buying bonds, in many different forms.
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