Debt and equity are two types of investments with different characteristics. Debt is a safer investment because it has a senior claim on the assets of a company and comes in different forms such as senior debt, junior debt, mezzanine debt, and convertible debt. The interest rate charged on debt is inversely related to the level of security, meaning the more secure the loan, the lower the interest rate. Equity, on the other hand, is a residual claim that gets everything that’s left over after the debt is paid off. This means that if a business grows in value, the stockholder benefits from the residual value. Lenders are willing to take a lower return on investment than stockholders because they have a more secure position and can sell the business if it fails, whereas stockholders risk losing their entire investment.