Secured vs Unsecured Debt
Debt is an external source of finance generally a liability which a business has to return after an agreed period of time. The cost of holding the debt is termed as Interest.
The major classification of debt in connection to financial or investment analysis are two –
1.??Secured debt
2.??Unsecured debt
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·?????Secured debt – Is a debt which holds assets of a company as a security against the amount of debt and its holding cost or interest is generally low and it generally creates arrangements of repayment in advance like DRR (Debt redemption reserve), EMI repayment system, periodical debt repayment investment plans etc.
·?????Unsecured debt – Is a debt which is free from any asset back up and it is created mostly on the basis of the goodwill of the firm. It may or may not have debt repayment arrangements in advance and the cost of holding an unsecured debt or rate of interest is usually high.
Therefor apart from debt and equity ratio another ratio which is Secured debt/Total debt and Unsecured debt/Total debt I also required to be analysed.
Their results need to be analyzed after considering the goodwill of the firm on the monetary basis as Unsecured debt are directly related to two variables one is goodwill and another is higher rate of interest.