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Debt Securities

15 January, 2016 - 09:38

A second source of funds is borrowing through debt securities. A corporation may take out a debt security such as a loan, commonly evidenced by a note and providing security to the lender. This is covered in Secured Transactions and Suretyship and Mortgages and Nonconsensual Liens . A common type of corporate debt security is a bond, which is a promise to repay the face value of the bond at maturity and make periodic interest payments called the coupon rate. For example, a bond may have a face value of $1,000 (the amount to be repaid at maturity) and a coupon rate of 7 percent paid annually; the corporation pays $70 interest on such a bond each year. Bondholders have priority over stockholders because a bond is a debt, and in the event of bankruptcy, creditors have priority over equity holders.