Lesson 1 of 7 · 12 min
Debt and equity: two different claims
Lenders hold a fixed, finite, priority claim backed by a contract, while shareholders hold a permanent, residual claim with votes but no promised payments.
In short
- Debt has a finite maturity and contractually promised interest and principal; lenders are paid before shareholders.
- Equity is permanent capital and a residual claim: shareholders get what is left after every prior claim is met.
- Dividends are discretionary (set by the board); interest is contractual.
- Shareholders vote (for example to elect the board); lenders have no vote but protect themselves through contract terms and claims on assets.
- Interest is usually tax deductible for the issuer; dividends are not.
- Suppliers, employees and governments (taxes) also rank ahead of shareholders.
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