Types of Equity Financing

Now let’s go through the individual types of debt and equity financing. Within the world of debt financing, there is secured debt and unsecured debt. The difference depends on whether there is collateral backing up the debt or not. Collateral is what the bank has the right to take from you if you don’t pay off your debt. Secured debt is backed by collateral, and unsecured debt is not backed by collateral. Unsecured bonds are also known as debentures.

Next, there’s a type of bond called a subordinated debenture. Subordinate means that the bondholder will be lower on the priority list in case of bankruptcy.

Next, there’s a type of bond called a junk bond, which is for a company that’s in a very poor financial position. A junk bond pays high interest rates but it’s not guaranteed to pay back the bondholders.

Next is an income bond, which is when a company’s not obligated to make any interest payments until it reaches a certain income level. Next is a zero coupon bond, which is a bond that does not pay any interest. The bond’s value will be impounded into the initial issuance price (with a discount or premium).

With a term bond, the company does not have to pay back until the end of the bond’s life. These are the most typical bonds. With a serial bond, the company gradually pays back the bond throughout its life.

With a convertible bond, the owner can exercise their option to convert the bond into a common share of stock. A redeemable bond means that the owner of the bond can demand early repayment. A callable bond is when the seller of the bond is allowed to pay it off early.