2.1.  Debt Securities

At the beginning of Chapter One, we talked about how issuing debt securities is another way for a company to raise money in the securities markets. Let’s consider this practice in more detail.

Issuing debt securities allows a business to get financing without diluting ownership and control, which are the downsides of equity financing (selling stock). Additionally, interest on debt is generally a tax-deductible expense on the corporation’s taxes. This means that it costs a company more to pay dividends to stockholders than interest to debt-holders, since dividends are paid out of after tax profits. Companies generally seek a balance between equity and debt financing, depending on their size, their profitability, their cash flow needs, and the nature of their assets.

The most common type of debt security is a bond. A bond is like an IOU for a fixed amount of money.