Debt Features and the Debt-to-Equity Ratio Explained

Decision Analysis

Debt Features and the Debt-to-Equity Ratio

Collateral agreements can reduce the risk of loss for both bonds and notes. Unsecured bonds and notes are riskier because the issuer’s obligation to pay interest and principal has the same priority as all other unsecured liabilities in the event of bankruptcy. If a company is unable to pay its debts in full, the unsecured creditors (including the holders of debentures) lose all or a portion of their balances. These types of legal agreements and other characteristics of long-term liabilities are crucial for effective business decisions. The first part of this section describes the different types of features sometimes included with bonds and notes. The second part explains and applies the debt-to-equity ratio.