Contractual Interest

• Interest-bearing investments are vehicles such as bonds and loans. The investor gives an entity an amount of money called the principal, and in return the entity gives the investor a contract stating the interest that it will pay on the principal, how often it will make payments and when the investor gets the principal back. Contractual interest is usually fixed and written into the contract, but the investor and borrower can specify a variable rate.
  
  

Equity Investments

• Investors can purchase ownership, or equity, in a company. The investor does this by providing the company or ownership group with funds, and company or group then provides the investor with proof of ownership. In such an arrangement the investor expects to receive a share of company profits and most likely hopes to eventually sell her ownership stake for more than she originally paid.
  
  

Differences

• Contractual interest investments, whether variable or not, offer a steady stream of income and eventual repayment of principal, unless the borrower defaults. The investor is a creditor and has a right to interest and principal. Equity investments often offer a larger possible payout, but the investor is not entitled to regular payments or any money back. In equity investments, the investor is an owner and therefore takes on the risks associated with owning a business.
  
  

Equity Method Accounting

• Most companies invest, and some companies invest substantially in other companies. Companies that own an influential portion of a company but do not control the company -- such as those with stock holdings amounting to less than 50 percent of the investment business -- use an equity method accounting system. Equity method accounting reports the value of the portion of equity that the investor company owns on its balance sheet.