Investor Perspective

Status of the holder:

• Debt represents a contractual obligation on the part of the issuing company. Debtholders are creditors of the business with no ownership.
• Shareholders are the owners of the corporation.

Income and benefits:

• Debtholders earn fix interest incomes and the return of principal.
• Shareholders earn dividend income and capital appreciation of their shares.

Residual asset claim:

• Debtholders have claim priority. They are always prioritized in case of bankruptcy. However, they are entitled only to the interest payments and the return of principal.
• Shareholders have no priority in claims. They are the least prioritized in case of bankruptcy. However, they are entitled to whatever firm value remains after paying off the priority claim holders, which grants them unlimited upside potential.

Voting rights (Decision-making):

• Debtholders do not carry any voting rights.
• Shareholders in general have voting right.

Issuer Perspective

Tax treatments:

• Interest payments on debt are typically a tax-deductible expense for the corporation.
• Dividend payments on equity are not tax deductible.

Repayment of investments:

• A corporation that cannot meet its contractual obligations to the debtholders can be forced into bankruptcy and liquidation.
• Equity does not involved a contractual obligation.

Potential conflict can occur between debtholders and equity holders. Debtholders would prefer the corporation to invest in safer projects that produce smaller, more certain cash flows that are large enough to service the debt. Equityholders would prefer riskier projects that have much larger return potential, which they do not share with the debtholders.