Writing Project Presentation

EQUITY SECURITIES AND

INVESTMENTS

To: Board of Directors

From: Alexis Aguirre Leon

Date: 05/31/2020

Subject: DEBT AND EQUITY SECURITIES

Question 1:

Debt and equity securities offers operating fuel which is heavily depended upon by companies

to run their business and to fund their operating activities on long term and short-term basis.

Companies and government seek funds through the equity and debt instruments in the market.

Equity securities is a section of capital ownership in the market. Anyone who buys equity

instrument becomes a shareholder meaning he owns part of the company. The benefits of being

a shareholder is that there are divided that are paid to shareholders periodically. Shareholders

has the voting rights in important corporate affairs such the appointment and recruitment of

directors and senior managers in the company. Shares are important part of company funding

since their interest rates are lower than the lending rates of the banks. In the debt instrument,

there are two parties who gets into contract where one parties agrees to lead the other party some

amount of money which would be repaid in the future or maturity date. Debt security include

the interests, corporate bonds and account payable. Shortest time that the bond can mature is 12

months. There are secured debt securities where collateral must be provided before the lending

takes place.

EQUITY SECURITIES AND

INVESTMENTS

Question 2

Debt investment: Firms can raise through selling of debt instrument to investors whether

individuals or institutions. The lender is the creditor who receives a promise that the principal

amount and interest would be paid a determined date in future. Bonds, bills and notes are some

of be debt investment method used by companies. When the company is being liquidated, they

are paid first because they are creditor (unlike, equity financing where shareholders are not paid

when company collapses since they are the owners). The cost of debt is the interest that is paid

to debt investors since when a company issues debt, they promise to pay both the the principal

amount and interest amount ( coupon payment) annually.

Equity investment: As described earlier on, shareholders are the people who owns a portion of

the company by buying the shares. This offer shares that have their values changing rapidly

since the stock market is very volatile. But the volatility is mainly because of the governmental,

social or political issues and not the organizations that is backing them. This is a high-risk type

of investment because of the potentially high risks and rewards. Creditors are given preferential

treatment during liquidation unlike shareholders.

Question 3

Accounting for the debt and equity has to be done as source of capital. However, for the equity

security, accounting is highly determined by the amount of influence and control over the

operating decisions the lender has over the company issuing the shares. For the shares that less

than 20%, such investor has little of no control over the issuing company. Such case has to be

accounted for through cost method. For amount of share between 20%- 50% of the total stock,

such investor, whether institution or individual, has significant influence over the firm he has

invested in. such kind of equity security is accounted for using the equity method. In the event

EQUITY SECURITIES AND

INVESTMENTS

the investor has stock that is higher than 50% of the total stock, he or she has significant control.

Such kind of investment is accounted for using the consolidated financial statement. In case of

debt security, the accounting is done using the entry in the asset account as the debt investment.

There are acquisition costs which include investment fee of brokers commission. The bond can

be held to maturity or sold especially the long term investment ones. There could be a gain or

a loss when they are sold before maturity.

References

Benjamin, G., & Margulis, J. (2013). Angel capital: How to raise early-stage private equity financing.

Hoboken, N.J: John Wiley.

ALTERNATIVE INVESTMENTS: Caia level i, set. (2019). S.l.: JOHN WILEY & SONS.

Baker, H. K., Filbeck, G., & Kiymaz, H. (2015). Private equity: Opportunities and risks.

Chorafas, D. N. (2014). The Management of Bond Investments and Trading of Debt. Saint Louis:

Elsevier Science