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What are the key distinctions between "debt" and "equity"? If a firm goes bankrupt, would you...

What are the key distinctions between "debt" and "equity"? If a firm goes bankrupt, would you rather be a holder of the firm's debt or a holder of the firm's equity?

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Answer #1

Debt and Equity are sources of capital for the firm.

Debt is a fixed income instrument. These involves less risk. Return on these instruments are fixed in the form of coupon payments or interest payments.

Equity is an instrument which is invested in the shares of the company. Equity investments are the riskiest source of investments. Return on these instruments can be in the form of Dividends which depends on the profitability of the company.

If the firm goes bankrupt, i would rather be a debt holder because the debt holders have a first claim over the assets of the company and the equity holders will have the claim in the leftover assets.

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