Debt investment refers to the investment that is done through the purchase of bonds or debentures, instead of through the purchase of common stocks. In debt investment, a firm accumulates fund by selling bonds or bills. Debt investment confirms a lower risk to the investors but it does not offer a huge return on an equity investment.
Date investment associates the following facts:
- Savings Accounts
- Certificates of Deposit
- Corporate Bonds
- Government Bonds
- Municipal Bonds
Some of the advantages in debt investment are following:
- Debt investment does not affect the owner’s ownership interest in the company.
- Short time profit can be expected in Debt investment.
- Debt investment decreases investment risks.
- This is a great financial growth strategy.
Some of the disadvantages in debt investment are following:
- Debt investment does not offer a higher profit rate like an equity investment.
- It is a borrowing against future earnings.
- In debt investment, repayment is a must.
- Bad impact on credit rating is a remarkable disadvantage of debt investment.
- Fixed interest cost.
- The larger a company’s debt-equity ratio, the more risky the company is considered by lenders and investors.
Focusing on the above factors we come to understand that debt investment has both advantages and disadvantages. But sometimes debt investment shows much than disadvantages by playing very important role in capital accumulation ant investment. Though it has to bear a fixed amount of interest but it also reduces risks in investment.